##### Table of Contents



UNITED STATES

SECURITIES
AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2016

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM  TO

COMMISSION FILE NUMBER: 814-00891

PENNANTPARK FLOATING RATE CAPITAL LTD.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|MARYLAND                                                       |  | 27-3794690                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|590 Madison Avenue,
15th Floor New York, N.Y.                  |  | 10022                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code (212)-905-1000

Securities registered pursuant to Section 12(b) of the Act:



|                                         |  |                                          
|---------------------------------------- |  | -----------------------------------------
|Title of Each Class                      |  | Name of Each Exchange on Which Registered
|Common Stock, par value $0.001 per share |  | The NASDAQ Stock Market LLC              

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x.

The aggregate market value of common stock held by non-affiliates of the Registrant on March 31, 2016 based on the closing price on that date
of $11.70 on the NASDAQ Global Select Market was approximately $309 million. For the purposes of calculating the aggregate market value of common stock held by non-affiliates, all directors and executive officers of the Registrant have been treated
as affiliates. There were 26,730,074 shares of the Registrants common stock outstanding as of November 22, 2016.

Documents
Incorporated by Reference: Portions of the Registrants Proxy Statement relating to the Registrants 2017 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on
Form 10-K are incorporated by reference into Part III of this Report.







---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD.

FORM 10-K

FOR THE FISCAL
YEAR ENDED SEPTEMBER 30, 2016

TABLE OF CONTENTS

PART I



|         |  |                                                                                                               |  |  |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Item 1   |  | Business                                                                                                      |  |  | 1  | 
|         |  |                                                                                                              
|Item 1A. |  | Risk Factors                                                                                                  |  |  | 15 | 
|         |  |                                                                                                              
|Item 1B. |  | Unresolved Staff Comments                                                                                     |  |  | 29 | 
|         |  |                                                                                                              
|Item 2.  |  | Properties                                                                                                    |  |  | 29 | 
|         |  |                                                                                                              
|Item 3.  |  | Legal Proceedings                                                                                             |  |  | 29 | 
|         |  |                                                                                                              
|Item 4.  |  | Mine Safety Disclosures                                                                                       |  |  | 29 | 
|        
|PART II  | 
|         |  |                                                                                                              
|Item 5.  |  | Market For Registrants Common Equity, Related Stockholder Matters and
 Issuer Purchases of Equity Securities |  |  | 30 | 
|         |  |                                                                                                              
|Item 6.  |  | Selected Financial Data                                                                                       |  |  | 33 | 
|         |  |                                                                                                              
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results
 of Operations                        |  |  | 34 | 
|         |  |                                                                                                              
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  |  | 41 | 
|         |  |                                                                                                              
|Item 8.  |  | Consolidated Financial Statements and Supplementary Data                                                      |  |  | 42 | 
|         |  |                                                                                                              
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                          |  |  | 68 | 
|         |  |                                                                                                              
|Item 9A. |  | Controls and Procedures                                                                                       |  |  | 68 | 
|         |  |                                                                                                              
|Item 9B. |  | Other Information                                                                                             |  |  | 68 | 
|        
|PART III | 
|         |  |                                                                                                              
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                        |  |  | 69 | 
|         |  |                                                                                                              
|Item 11. |  | Executive Compensation                                                                                        |  |  | 69 | 
|         |  |                                                                                                              
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related
 Stockholder Matters               |  |  | 69 | 
|         |  |                                                                                                              
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                     |  |  | 69 | 
|         |  |                                                                                                              
|Item 14. |  | Principal Accountant Fees and Services                                                                        |  |  | 69 | 
|        
|PART IV  | 
|         |  |                                                                                                              
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                    |  |  | 70 | 
|         |  |                                                                                                              
|         |  | Signatures                                                                                                    |  |  | 71 | 



---

##### Table of Contents

PART I

In this annual report on Form 10-K, or the Report, except where the context suggests otherwise, the terms Company,
we, our or us refer to PennantPark Floating Rate Capital Ltd. and its wholly-owned consolidated subsidiaries; Funding I refers to PennantPark Floating Rate Funding I, LLC; PennantPark Investment
Advisers or Investment Adviser refers to PennantPark Investment Advisers, LLC; PennantPark Investment Administration or Administrator refers to PennantPark Investment Administration, LLC; 1940
Act refers to the Investment Company Act of 1940, as amended; Code refers to the Internal Revenue Code of 1986, as amended; RIC refers to a regulated investment company under the Code; BDC refers to a
business development company under the 1940 Act and MCG refers to MCG Capital Corporation. References to our portfolio, our investments, our multi-currency, senior secured revolving credit facility, as amended and restated, or the Credit
Facility, and our business include investments we make through our subsidiaries. Some of the statements in this annual report constitute forward-looking statements, which apply to us and relate to future events, future performance or future
financial condition. The forward-looking statements involve risks and uncertainties for us and actual results could differ materially from those projected in the forward-looking statements for any reason, including those factors discussed in
Risk Factors and elsewhere in this Report.



|Item 1. | Business
|------- | --------

General Business of PennantPark Floating Rate Capital Ltd.

PennantPark Floating Rate Capital Ltd. is a BDC whose objectives are to generate current income and capital appreciation while seeking to
preserve capital by investing primarily in loans bearing a variable-rate of interest, or Floating Rate Loans, and other investments made to U.S. middle-market companies.

We believe that Floating Rate Loans to U.S. middle-market companies offer attractive risk-reward to investors due to a limited amount of capital
available for such companies and the potential for rising interest rates. We use the term middle-market to refer to companies with annual revenues between $50 million and $1 billion. Our investments are typically rated below investment
grade. Securities rated below investment grade are often referred to as leveraged loans or high yield securities or junk bonds and are often higher risk compared to debt instruments that are rated above investment
grade and have speculative characteristics. However, when compared to junk bonds and other non-investment grade debt, senior secured Floating Rate Loans typically have more robust capital-preserving qualities, such as historically lower default
rates than junk bonds, represent the senior source of capital in a borrowers capital structure and often have certain of the borrowers assets pledged as collateral. Our debt investments may generally range in maturity from three to ten
years and are made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities which operate in various industries and geographical regions.

Under normal market conditions, we generally expect that at least 80% of the value of our Managed Assets, which means our net assets plus any
borrowings for investment purposes, will be invested in Floating Rate Loans and other investments bearing a variable-rate of interest. We generally expect that senior secured debt, or first lien loans, will represent at least 65% of our overall
portfolio. We also generally expect to invest up to 35% of our overall portfolio opportunistically in other types of investments, including mezzanine securities (as described below) and, to a lesser extent, equity investments. We seek to create a
diversified portfolio by generally targeting an investment size between $3 million and $15 million, on average, although we expect that this investment size will vary proportionately with the size of our capital base.

Our investment activity depends on many factors, including the amount of debt and equity capital available to middle-market companies, the level
of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. We have used, and expect to continue to use, our Credit Facility, proceeds from the
rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives.

Organization and
Structure of PennantPark Floating Rate Capital Ltd.

PennantPark Floating Rate Capital Ltd., a Maryland corporation organized in
October 2010, is a closed-end, externally managed, non-diversified investment company that has elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated, and intend to qualify
annually, as a RIC under the Code.

Funding I, our wholly owned subsidiary and a special purpose entity, was organized in Delaware as a
limited liability company in May 2011. We formed Funding I in order to establish our Credit Facility.

In August 2015, we completed the
acquisition of MCG pursuant to the Agreement and Plan of Merger, or the Merger Agreement, by and among MCG, our Investment Adviser and the Company. As a result of the transactions completed by the Merger Agreement, MCG was ultimately merged with and
into PFLT Funding II, LLC with PFLT Funding II, LLC as the surviving company.

Our Investment Adviser and Administrator

We utilize the investing experience and contacts of PennantPark Investment Advisers in developing what we believe is an attractive and
diversified portfolio. The senior investment professionals of the Investment Adviser have worked together for many years and average over 25 years of experience in the senior lending, mezzanine lending, leveraged finance, distressed debt and private
equity businesses. In addition, our senior investment professionals have been involved in originating, structuring, negotiating, managing and monitoring investments in each of these businesses across changing economic and market cycles. We believe
this experience and history has resulted in a strong reputation with financial sponsors, management teams, investment bankers, attorneys and accountants, which provides us with access to substantial investment opportunities across the capital
markets. Our Investment Adviser has a rigorous investment approach, which is based upon intensive financial analysis with a focus on capital preservation, diversification and active management. Since our Investment Advisers inception in 2007,
it has raised about $3.0 billion in debt and equity capital and has invested $5.5 billion in more than 400 companies with over 160 different financial sponsors through its managed funds.

Our Administrator has experienced professionals with substantial backgrounds in finance and administration of registered investment companies.
In addition to furnishing us with clerical, bookkeeping and record keeping services, the Administrator also oversees our financial records as well as the preparation of our reports to stockholders and reports filed with the Securities and Exchange
Commission, or the SEC. The Administrator assists in the determination and publication of our net asset value, or NAV, oversees the preparation and filing of our tax returns, and monitors the payment of our expenses as well as the performance of
administrative and professional services rendered to us by others. Furthermore, our Administrator may provide, on our behalf, managerial assistance to those portfolio companies to which we are required to offer such assistance. See Risk
FactorsRisks Relating to our Business and StructureThere are significant potential conflicts of interest which could impact our investment returns for more information.



1



---

##### Table of Contents

Market Opportunity

We believe that the limited amount of capital available to middle-market companies, coupled with the desire of these companies for flexible
sources of capital, creates an attractive investment environment for us.



| |  |  | We believe middle-market companies have faced difficulty in raising debt through the capital markets. Many middle-market companies look to raise funds by issuing high-yield bonds. We believe this approach to
financing becomes difficult at times when institutional investors seek to invest in larger, more liquid offerings. We believe this has made it harder for middle-market companies to raise funds by issuing high-yield securities from time to time.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We believe middle-market companies have faced difficulty raising debt in private markets. From time to time, banks, finance companies, hedge funds and collateralized loan obligation, or CLO, funds have withdrawn,
and may again withdraw, capital from the middle-market, resulting in opportunities for alternative funding sources.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We believe that credit market dislocation for middle-market companies improves the risk-reward on our investments. From time to time, market participants have reduced lending to middle-market and non-investment
grade borrowers. As a result, we believe there is less competition in our market, more conservative capital structures, higher yields and stronger covenants.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We believe there is a large pool of uninvested private equity capital likely to seek to combine their capital with sources of debt capital to complete private investments. We expect that private equity firms will
continue to be active investors in middle-market companies. These private equity funds generally seek to leverage their investments by combining their capital with senior secured debt and/or mezzanine debt provided by other sources, and we believe
that our capital is well-positioned to partner with such equity investors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We believe there is substantial supply of opportunities resulting from maturing loans that seek refinancing. A high volume of financings will come due in the next few years. Additionally, we believe that demand
for debt financing from middle-market companies will remain strong because these companies will continue to require credit to refinance existing debt, to support growth initiatives and to finance acquisitions. We believe the combination of strong
demand by middle-market companies and from time to time the reduced supply of credit described above should increase lending opportunities for us. We believe this supply of opportunities coupled with a lack of demand offers attractive risk-reward to
investors.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Competitive Advantages

We believe that we have the following competitive advantages over other capital providers to middle-market companies:

a) Experienced Management Team

The senior investment professionals of our Investment Adviser have worked together for many years and average over 25 years of experience in
senior lending, mezzanine lending, leveraged finance, distressed debt and private equity businesses. These senior investment professionals have been involved in originating, structuring, negotiating, managing and monitoring investments in each of
these businesses across changing economic and market cycles. We believe this extensive experience and history has resulted in a strong reputation across the capital markets.

Lending to middle-market companies requires in-depth diligence, credit expertise, restructuring experience and active portfolio management. For
example, lending to middle-market companies in the United States is generally more labor intensive than lending to larger companies due to the smaller size of each investment and the fragmented nature of the information available with respect to
such companies. We are able to provide value-added customized financial solutions to middle-market companies as a result of specialized due diligence, underwriting capabilities and more extensive ongoing monitoring required as lenders.

b) Disciplined Investment Approach with Strong Value Orientation

We employ a disciplined approach in selecting investments that meet the long-standing, consistent value-oriented investment selection criteria
employed by our Investment Adviser. Our value-oriented investment philosophy focuses on preserving capital and ensuring that our investments have an appropriate return profile in relation to risk. When market conditions make it difficult for us to
invest according to our criteria, we are highly selective in deploying our capital. We believe this approach continues to enable us to build an attractive investment portfolio that meets our return and value criteria over the long-term.

We believe it is critical to conduct extensive due diligence on investment targets. In evaluating new investments we, through our Investment
Adviser, conduct a rigorous due diligence process that draws from our Investment Advisers experience, industry expertise and network of contacts. Among other things, our due diligence is designed to ensure that each prospective portfolio
company will be able to meet its debt service obligations. See Investment Selection Criteria for more information.

In addition
to engaging in extensive due diligence, our Investment Adviser seeks to reduce risk by focusing on businesses with:



| |  |  | strong competitive positions;
| | - |  | -----------------------------



| |  |  | positive cash flow that is steady and stable;
| | - |  | ---------------------------------------------



| |  |  | experienced management teams with strong track records;
| | - |  | -------------------------------------------------------



| |  |  | potential for growth and viable exit strategies; and
| | - |  | ----------------------------------------------------



| |  |  | capital structures offering appropriate risk-adjusted terms and covenants.
| | - |  | --------------------------------------------------------------------------

c) Ability to
Source and Evaluate Transactions through our Investment Advisers Proactive Research Capability and Established Network

The
management team of our Investment Adviser has long-term relationships with financial sponsors, management consultants and management teams that we believe enable us to evaluate investment opportunities effectively in numerous industries, as well as
provide us access to substantial information concerning those industries. We identify potential investments both through active origination and through dialogue with numerous financial sponsors, management teams, members of the financial community
and corporate partners with whom the professionals of our Investment Adviser have long-term relationships.



2



---

##### Table of Contents

d) Flexible Transaction Structuring

We are flexible in structuring investments and tailor investments to meet the needs of a portfolio company while also generating attractive
risk-adjusted returns. We can invest in all parts of a capital structure and our Investment Adviser has extensive experience in a wide variety of securities for leveraged companies throughout economic and market cycles.

Our Investment Adviser seeks to minimize the risk of capital loss without foregoing potential for capital appreciation. In making investment
decisions, we seek to invest in companies that we believe can generate consistent positive risk-adjusted returns.

We believe that the
in-depth experience of our Investment Adviser will enable us to invest throughout various stages of the economic and market cycles and to provide us with ongoing market insights in addition to a significant investment opportunity.

Competition

Our primary competitors
provide financing to middle-market companies and include other BDCs, commercial and investment banks, commercial finance companies, CLO funds and, to the extent they provide an alternative form of financing, private equity funds. Additionally,
alternative investment vehicles, such as hedge funds, frequently invest in middle-market companies. As a result, competition for investment opportunities in middle-market companies can be intense. However, we believe that from time to time there has
been a reduction in the amount of debt capital available to middle-market companies, which we believe has resulted in a less competitive environment for making new investments.

Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For
example, we believe some competitors have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors have higher risk tolerances or different risk assessments, which could allow them to
consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. See Risk FactorsRisks
Relating to our Business and StructureWe operate in a highly competitive market for investment opportunities for more information.

Leverage

As of September 30,
2016, we maintained a $350 million Credit Facility, which matures in August 2020, with SunTrust Bank and other lenders, or the Lenders. During the Credit Facilitys revolving period, which extends to August 2018, it bears interest at London
Interbank Offered Rate, or LIBOR, plus 200 basis points, and after the revolving period, the rate sets to LIBOR plus 425 basis points for the remaining two years. The Credit Facility is secured by all of the assets held by Funding I, under which we
had $232.9 million outstanding. The annualized weighted average cost of debt for the year ended September 30, 2016, inclusive of the fee on the undrawn commitment on the Credit Facility but excluding amendment costs, was 3.51%. As of
September 30, 2016 and 2015, we had $117.1 million and $260.4 million of unused borrowing capacity under our Credit Facility, respectively, subject to the regulatory restrictions. We believe that our capital resources provide us with the
flexibility to take advantage of market opportunities when they arise. Our use of leverage, as calculated under the asset coverage ratio of the 1940 Act, may generally range between 70% and 90% of our net assets, or 40% to 50% of our Managed Assets.
We cannot assure investors that our leverage will remain within the range. The amount of leverage that we employ will depend on our assessment of the market and other factors at the time of any proposed borrowing. See Managements
Discussion and Analysis of Financial Condition and Results of Operations for more information.

Investment Policy Overview

We seek to create a diversified portfolio primarily of Floating Rate Loans by generally targeting an investment size of $3 million to $15
million in securities, on average, of middle-market companies. We expect this investment size to vary proportionately with the size of our capital base. We generally expect that senior secured debt, or first lien loans, will represent at least 65%
of our overall portfolio. We also generally expect to invest up to 35% of our overall portfolio opportunistically in other types of investments, including mezzanine securities and, to a lesser extent, equity investments. The companies in which we
invest are typically highly leveraged, and, in most cases, are not rated by national rating agencies. If such unrated companies were rated, we believe that they would typically receive a rating below investment grade (between BB and CCC under the
Standard & Poors system) from the national rating agencies. In addition, we expect our debt investments to range in maturity from three to ten years.

Over time, we expect that our portfolio will continue to consist primarily of Floating Rate Loans in qualifying assets such as private, or
thinly traded or small market-capitalization, U.S. middle-market public companies. In addition, we may invest up to 30% of our portfolio in non-qualifying assets. These non-qualifying assets may include investments in public companies whose
securities are not thinly traded or have a market capitalization of greater than $250 million, securities of middle-market companies located outside of the United States and investment companies as defined in the 1940 Act. We may acquire investments
in the secondary markets. See RegulationQualifying Assets and Investment Selection Criteria for more information.

Our board of directors has the authority to modify or waive certain of our operating policies and strategies without prior notice and without
stockholder approval (except as required by the 1940 Act). However, absent stockholder approval, under the 1940 Act we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. We cannot predict the effect
any changes to our current operating policies and strategies would have on our business, operating results and value of our stock. Nevertheless, the effects of changes to our operating policies and strategies may adversely affect our business, our
ability to make distributions and the value of our stock.

Senior Secured Debt

Structurally, senior secured debt (which we define as first lien debt) ranks senior in priority of payment to mezzanine debt and equity and
benefits from a senior security interest in the assets of the borrower. As such, other creditors rank junior to our investments in these securities in the event of insolvency. Due to its lower risk profile and often more restrictive covenants as
compared to mezzanine debt, senior secured debt generally earns a lower return than mezzanine debt. In some cases senior secured lenders receive opportunities to invest directly in the equity securities of borrowers and from time to time may also
receive warrants to purchase equity securities. We evaluate these investment opportunities on a case-by-case basis.

Mezzanine Debt

Structurally, mezzanine debt (which we define to include second lien secured debt and subordinated debt) usually ranks subordinate in priority
of payment to senior secured debt. Our second lien secured debt is subordinated debt that benefits from a security interest in the borrower. As such, other creditors may rank senior to us in the event of insolvency. Mezzanine debt ranks senior to
common and preferred equity in borrowers capital structures. Due to its higher risk profile and often less restrictive covenants as compared to senior secured debt, mezzanine debt generally earns a higher return than senior secured debt. In
many cases, mezzanine investors receive opportunities to invest directly in the equity securities of borrowers and from time to time may also receive warrants to purchase equity securities. We evaluate these investment opportunities on a
case-by-case basis.



3



---

##### Table of Contents

Investment Selection Criteria

We are committed to a value-oriented philosophy used by the senior investment professionals who manage our portfolio and seek to minimize the
risk of capital loss without foregoing potential for capital appreciation.

We have identified several criteria, discussed below, that we
believe are important in identifying and investing in prospective portfolio companies. These criteria provide general guidelines for our investment decisions. However, we caution that not all of these criteria will be met by each prospective
portfolio company in which we choose to invest. Generally, we seek to use our experience and access to market information to identify investment opportunities and to structure investments efficiently and effectively.

a) Leading and defensible competitive market positions

The Investment Adviser invests in portfolio companies that it believes have developed strong positions within their markets. The Investment
Adviser also seeks to invest in portfolio companies that it believes possess competitive advantages, for example, in scale, scope, customer loyalty, product pricing or product quality as compared to their competitors to protect their market
position.

b) Investing in stable borrowers with positive cash flow

Our investment philosophy places a premium on fundamental analysis and has a distinct value-orientation. The Investment Adviser invests in
portfolio companies it believes to be stable and well-established, with strong cash flows and profitability. The Investment Adviser believes these attributes indicate portfolio companies that may be well-positioned to maintain consistent cash flow
to service and repay their liabilities and maintain growth in their businesses or their relative market share. The Investment Adviser currently does not expect to invest significantly in start-up companies, companies in turnaround situations or
companies with speculative business plans, although we are permitted to do so.

c) Proven management teams

The Investment Adviser focuses on investments in which the portfolio company has an experienced management team with an established track record
of success. The Investment Adviser typically requires that portfolio companies have in place proper incentives to align managements goals with our goals, including having equity interests.

d) Financial sponsorship

The Investment Adviser may seek to cause us to participate in transactions sponsored by what it believes to be trusted financial sponsors. The
Investment Adviser believes that a financial sponsors willingness to invest significant equity capital in a portfolio company is an implicit endorsement of the quality of that portfolio company. Further, financial sponsors of portfolio
companies with significant investments at risk may have the ability, and a strong incentive, to contribute additional capital in difficult economic times should financial or operational issues arise so as to maintain their ownership position.

e) Investments in different borrowers, industries and geographies

The Investment Adviser seeks to invest our assets broadly among portfolio companies, across industries and geographical regions. The Investment
Adviser believes that this approach may reduce the risk that a downturn in any one portfolio company, industry or geographical region will have a disproportionate impact on the value of our portfolio, although we are permitted to be non-diversified
under the 1940 Act.

f) Viable exit strategy

The Investment Adviser seeks to invest in portfolio companies that it believes will provide a steady stream of cash flow to repay our loans
while also reinvesting in their respective businesses. The Investment Adviser expects that such internally generated cash flow, leading to the payment of interest on, and the repayment of the principal of, our investments in portfolio companies to
be a key means by which we will exit from our investments over time. In addition, the Investment Adviser also seeks to invest in portfolio companies whose business models and expected future cash flows offer attractive exit possibilities. These
companies include candidates for strategic acquisition by other industry participants and companies that may repay our investments through an initial public offering of common stock, refinancing or other capital markets transaction.

Due Diligence

We believe it is
critical to conduct extensive due diligence in evaluating new investment targets. Our Investment Adviser conducts a rigorous due diligence process that is applied to prospective portfolio companies and draws from our Investment Advisers
experience, industry expertise and network of contacts. In conducting due diligence, our Investment Adviser uses information provided by companies, financial sponsors and publicly available information as well as information from relationships with
former and current management teams, consultants, competitors and investment bankers.

Our due diligence may include:



| |  |  | review of historical and prospective financial information;
| | - |  | -----------------------------------------------------------



| |  |  | research relating to the portfolio companys management, industry, markets, products and services and competitors;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | interviews with management, employees, customers and vendors of the potential portfolio company;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | on-site visits;
| | - |  | ---------------



| |  |  | review of loan documents; and
| | - |  | -----------------------------



| |  |  | background checks.
| | - |  | ------------------

Additional due diligence with respect to any investment may be conducted on
our behalf by attorneys and independent auditors prior to the closing of the investment, as well as other outside advisers, as appropriate.

Upon the completion of due diligence on a portfolio company, the team leading the investment presents the investment opportunity to our
Investment Advisers investment committee. This committee determines whether to pursue the potential investment. All new investments are required to be reviewed by the investment committee of our Investment Adviser. The members of the
investment committee receive no compensation from us. Rather, they are employees of and receive compensation from our Investment Adviser.



4



---

##### Table of Contents

Investment Structure

Once we determine that a prospective portfolio company is suitable for investment, we work with the management of that portfolio company and its
other capital providers, including senior, junior and equity capital providers, to structure an investment. We negotiate with these parties to agree on how our investment is structured relative to the other capital in the portfolio companys
capital structure.

We expect our Floating Rate Loans to have terms of three to ten years. We generally obtain security interests in the
assets of our portfolio companies that will serve as collateral in support of the repayment of these loans. This collateral may take the form of first priority liens on the assets of a portfolio company.

Typically, our mezzanine debt investments have maturities of three to ten years. Mezzanine debt may take the form of a second priority lien on
the assets of a portfolio company and have interest-only payments in the early years with cash or payment-in-kind, or PIK, payments with amortization of principal deferred to the later years. In some cases, we may invest in debt securities that, by
their terms, convert into equity or additional debt securities or defer payments of interest for the first few years after our investment. Also, in some cases, our mezzanine debt may be collateralized by a subordinated lien on some or all of the
assets of the borrower.

We seek to tailor the terms of the investment to the facts and circumstances of the transaction and the prospective
portfolio company, negotiating a structure that protects our rights and manages our risk while creating incentives for the portfolio company to achieve its business plan and improve its profitability. For example, in addition to seeking a senior
position in the capital structure of our portfolio companies, we seek to limit the downside potential of our investments by:



| |  |  | requiring a total return on our investments (including both interest in the form of a floor and potential equity appreciation) that compensates us for credit risk;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | incorporating put rights and call protection into the investment structure; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | negotiating covenants in connection with our investments that afford our portfolio companies as much flexibility in managing their businesses as possible, consistent with our focus of preserving capital. Such
restrictions may include affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation or participation rights.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our investments may include equity features, such as direct investments in the equity securities of borrowers or warrants or options to buy a
minority interest in a portfolio company. Any warrants we may receive with our debt securities generally require only a nominal cost to exercise, so as a portfolio company appreciates in value, we may achieve additional investment return from these
equity investments. We may structure the warrants to provide provisions protecting our rights as a minority-interest holder, as well as puts, or rights to sell such securities back to the portfolio company, upon the occurrence of specified events.
In many cases, we may also obtain registration rights in connection with these equity investments, which may include demand and piggyback registration rights.

We expect to hold most of our investments to maturity or repayment, but we may exit certain investments earlier when a liquidity event, such as
the sale or refinancing of a portfolio company, takes place. We also may turn over investments to better position the portfolio in light of market conditions.

Ongoing Relationships with Portfolio Companies

Monitoring

The
Investment Adviser monitors our portfolio companies on an ongoing basis. The Investment Adviser also monitors the financial trends of each portfolio company to determine if it is meeting its respective business plans and to assess the appropriate
course of action for each portfolio company.

The Investment Adviser has several methods of evaluating and monitoring the performance and
fair value of our investments, which may include the following:



| |  |  | assessment of success in adhering to a portfolio companys business plan and compliance with covenants;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | periodic or regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | comparisons to other portfolio companies in the industry, if any;
| | - |  | -----------------------------------------------------------------



| |  |  | attendance at and participation in board meetings or presentations by portfolio companies; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | review of periodic financial statements and financial projections for portfolio companies.
| | - |  | ------------------------------------------------------------------------------------------

The
Investment Adviser monitors credit risk of each portfolio company regularly with a goal toward identifying early, and when able and appropriate, exiting investments with potential credit problems. This monitoring process may include reviewing:
(1) a portfolio companys financial resources and operating history; (2) comparing a portfolio companys current operating results with the Investment Advisers initial thesis for the investment and its expectations for the
performance of the investment; (3) a portfolio companys sensitivity to economic conditions; (4) the performance of a portfolio companys management; (5) a portfolio companys debt maturities and capital requirements;
(6) a portfolio companys interest and asset coverage; and (7) the relative value of an investment based on a portfolio companys anticipated cash flow.

Managerial Assistance

We offer managerial assistance to our portfolio companies. As a BDC, we are required to make available such managerial assistance within the
meaning of Section 55 of the 1940 Act. See Regulation for more information.

Staffing

We do not currently have any employees. Our Investment Adviser and Administrator have hired and expect to continue to hire professionals with
skills applicable to our business plan, including experience in middle-market investing, senior lending, mezzanine lending, leveraged finance, distressed debt and private equity businesses.



5



---

##### Table of Contents

Our Corporate Information

Our administrative and principal executive offices are located at 590 Madison Avenue, 15th Floor, New York, NY 10022. Our common stock is quoted
on the NASDAQ Global Select Market under the symbol PFLT. Our phone number is (212) 905-1000, and our Internet website address is www.pennantpark.com. Information contained on our website is not incorporated by
reference into this Report and you should not consider information contained on our website to be part of this Report. We file periodic reports, proxy statements and other information with the SEC and make such reports available on our website free
of charge as soon as reasonably practicable. You may read and copy the materials that we file with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at www.sec.gov that contains material that we file with the SEC on the EDGAR Database.

Our Portfolio

Our principal
investment focus is to invest in Floating Rate Loans to U.S. middle-market companies in a variety of industries. We generally seek to target companies that generate positive cash flows from the broad variety of industries in which our Investment
Adviser has direct expertise. The following is an illustrative list of the industries in which the Investment Adviser has invested:



|                                                                   |  |                                                                         
|------------------------------------------------------------------ |  | ------------------------------------------------------------------------
|      Aerospace and Defense                                       |  |       Energy/Utilities                                                 
|      Auto Sector                                                 |  |       Environmental Services                                           
|      Beverage, Food and Tobacco                                  |  |       Financial Services                                               
|      Broadcasting and Entertainment                              |  |       Grocery                                                          
|      Buildings and Real Estate                                   |  |       Healthcare, Education and Childcare                              
|      Building Materials                                          |  |       High Tech Industries                                             
|      Business Services                                           |  |       Home & Office Furnishings, Housewares & Durable
Consumer Products
|      Cable Television                                            |  |       Hotels, Motels, Inns and Gaming                                  
|      Capital Equipment                                           |  |       Insurance                                                        
|      Cargo Transportation                                        |  |       Leisure, Amusement, Motion Picture,
Entertainment                
|      Chemicals, Plastics and Rubber                              |  |       Logistics                                                        
|      Communications                                              |  |       Manufacturing/Basic Industries                                   
|      Consumer Products                                           |  |       Media                                                            
|      Consumer Services                                           |  |       Mining, Steel, Iron and Non-Precious
Metals                      
|      Containers Packaging & Glass                                |  |       Oil and Gas                                                      
|      Distribution                                                |  |       Other Media                                                      
|      Diversified/Conglomerate Manufacturing                      |  |       Personal, Food and Miscellaneous
Services                        
|      Diversified/Conglomerate Services                           |  |       Printing and Publishing                                          
|      Diversified Natural Resources, Precious Metals and
Minerals |  |       Retail                                                           
|      Education                                                   |  |       Wholesale                                                        
|      Electronics                                                 |  |                                                                         

Listed below are our top ten portfolio companies and industries represented as a percentage of our consolidated
portfolio assets (excluding cash equivalents) as of September 30:



|                                                      |  |      |    |   |                   |                                             |      |  |    |  
|----------------------------------------------------- |  | ---- | -- | - | ----------------- | ------------------------------------------- | ---- |  | -- | -
|Portfolio Company                                     |  | 2016 |    |   | Portfolio Company |                                             | 2015 | 
|Marketplace Events LLC                                |  |      | 3  | % |                   | AKA Diversified Holdings, Inc.              |      |  | 3  | %
|Advanced Cable Communications, LLC                    |  |      | 2  |   |                   | Bowlmor AMF Corp.                           |      |  | 3  |  
|ALG USA Holdings, LLC                                 |  |      | 2  |   |                   | CRGT Inc.                                   |      |  | 3  |  
|AMF Bowling Centers, Inc.                             |  |      | 2  |   |                   | Howard Berger Co. LLC                       |      |  | 3  |  
|CD&R TZ Purchaser, Inc.                               |  |      | 2  |   |                   | Instant Web, LLC                            |      |  | 3  |  
|CRGT Inc.                                             |  |      | 2  |   |                   | Language Line, LLC                          |      |  | 3  |  
|Efficient Collaborative Retail Marketing Company, LLC |  |      | 2  |   |                   | Novitex Acquisition, LLC                    |      |  | 3  |  
|KHC Holdings, Inc.                                    |  |      | 2  |   |                   | Polyconcept Finance B.V.                    |      |  | 3  |  
|Novitex Acquisition, LLC                              |  |      | 2  |   |                   | Surgical Specialties Corporation (US), Inc. |      |  | 3  |  
|Triad Manufacturing, Inc.                             |  |      | 2  |   |                   | iEnergizer Limited and Aptara, Inc.         |      |  | 2  |  
|                                                      |  |      |   
|Industry                                              |  | 2016 |    |   | Industry          |                                             | 2015 | 
|Healthcare and Pharmaceuticals                        |  |      | 10 | % |                   | High Tech Industries                        |      |  | 13 | %
|High Tech Industries                                  |  |      | 10 |   |                   | Healthcare and Pharmaceuticals              |      |  | 12 |  
|Business Services                                     |  |      | 8  |   |                   | Business Services                           |      |  | 10 |  
|Consumer Goods: Durable                               |  |      | 7  |   |                   | Consumer Goods: Durable                     |      |  | 8  |  
|Hotel, Gaming and Leisure                             |  |      | 6  |   |                   | Retail                                      |      |  | 8  |  
|Telecommunications                                    |  |      | 6  |   |                   | Construction and Building                   |      |  | 6  |  
|Aerospace and Defense                                 |  |      | 5  |   |                   | Consumer Services                           |      |  | 6  |  
|Media: Diversified and Production                     |  |      | 5  |   |                   | Hotel, Gaming and Leisure                   |      |  | 5  |  
|Retail                                                |  |      | 5  |   |                   | Consumer Goods: Non-Durable                 |      |  | 4  |  
|Wholesale                                             |  |      | 5  |   |                   | Media: Advertising, Printing and Publishing |      |  | 4  |  

Our executive officers and directors, as well as the senior investment professionals of the Investment Adviser
and Administrator, may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do. Currently, the executive officers and directors, as well as certain of the current senior investment
professionals of the Investment Adviser and Administrator, serve as officers and directors of PennantPark Investment Corporation, a publicly traded BDC, and other managed funds, as applicable. Accordingly, they may have obligations to investors in
those entities, the fulfillment of which obligations might not be in the best interest of us or our stockholders. In addition, we note that any affiliated investment vehicle currently existing, or formed in the future, and managed by the Investment
Adviser and or its affiliates may, notwithstanding different stated investment objectives, have overlapping investment objectives with our own and, accordingly, may invest in asset classes similar to those targeted by us. As a result, the Investment
Adviser may face conflicts in allocating investment opportunities among us and such other entities. The Investment Adviser will allocate investment opportunities in a fair and equitable manner consistent with our allocation policy, and we have
received exemptive relief with respect to certain co-investment transactions. Where co-investment is unavailable or inappropriate, the Investment Adviser will choose which investment fund should receive the allocation. See Risk
FactorsRisks Relating to our Business and StructureThere are significant potential conflicts of interest which could impact our investment returns for more information.

We may invest, to the extent permitted by law, in the securities and instruments of other investment companies and companies that would be
investment companies but are excluded from the definition of an investment company provided in Section 3(c) of the 1940 Act. We may also co-invest in the future on a concurrent basis with our affiliates, subject to compliance with applicable
regulations, our trade allocation procedures and, if applicable, the terms of our exemptive relief.



6



---

##### Table of Contents

Investment Management Agreement

We have entered into an agreement with the Investment Adviser, or the Investment Management Agreement, under which the Investment Adviser,
subject to the overall supervision of our board of directors, manages the day-to-day operations of, and provides investment advisory services to, us. Mr. Penn, our Chairman and Chief Executive Officer, is the managing member and a senior
investment professional of, and has a financial and controlling interest in, PennantPark Investment Advisers. PennantPark Floating Rate Capital Ltd., through the Investment Adviser, provides similar services to Funding I under its collateral
management agreement. Funding Is collateral management agreement does not affect the management or incentive fees that we pay to the Investment Adviser on a consolidated basis. Under the terms of our Investment Management Agreement, the
Investment Adviser:



| |  |  | determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | closes and monitors the investments we make; and
| | - |  | ------------------------------------------------



| |  |  | provides us with such other investment advisory, research and related services as we may need from time to time.
| | - |  | ----------------------------------------------------------------------------------------------------------------

PennantPark Investment Advisers services under our Investment Management Agreement are not exclusive, and it is free to furnish similar
services, without the prior approval of our stockholders or our board of directors, to other entities so long as its services to us are not impaired. Our board of directors monitors for any potential conflicts that may arise upon such a development.
For providing these services, the Investment Adviser receives a fee from us, consisting of two componentsa base management fee and an incentive fee or, collectively, Management Fees.

Investment Advisory Fees

The base
management fee is calculated at an annual rate of 1.00% of our average adjusted gross assets, which equals our gross assets (net of U.S. Treasury Bills, temporary draws under any credit facility, cash and cash equivalents, repurchase
agreements or other balance sheet transactions undertaken at the end of a fiscal quarter for purposes of preserving investment flexibility for the next quarter and adjusted to exclude cash, cash equivalents and unfunded commitments, if any) and is
payable quarterly in arrears. The base management fee is calculated based on the average adjusted gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during
the current calendar quarter. For example, if we sold shares on the 45th day of a quarter and did not use the proceeds from the sale to repay outstanding indebtedness, our gross assets for such quarter would give effect to the net proceeds of the
issuance for only 45 days of the quarter during which the additional shares were outstanding. For the fiscal years ended September 30, 2016, 2015 and 2014, the Investment Adviser earned a base management fee of $5.0 million, $3.6 million and
$3.7 million, respectively, from us.

The following is a hypothetical example of the calculation of average adjusted gross assets:

Gross assets as of December 31, 20XX = $160 million

U.S. Treasury bills and temporary draws on credit facilities as of December 31, 20XX = $10 million

Adjusted gross assets as of December 31, 20XX = $150 million

Gross assets as of March 31, 20XX = $200 million

U.S. Treasury bills and temporary draws on credit facilities as of March 31, 20XX = $20 million

Adjusted gross assets as of March 31, 20XX = $180 million

Average value of adjusted gross assets as of March 31, 20XX and December 31, 20XX, which are the two most recently completed calendar
quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter equals ($150 million + $180 million) / 2 = $165 million.

The incentive fee has two parts, as follows:

One part is calculated and payable quarterly in arrears based on our Pre-Incentive Fee Net Investment Income for the immediately preceding
calendar quarter. For this purpose, Pre-Incentive Fee Net Investment Income means interest income, dividend income and any other income, including any other fees (other than fees for providing managerial assistance), such as amendment, commitment,
origination, prepayment penalties, structuring, diligence and consulting fees or other fees received from portfolio companies, accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, any
expenses payable under the Administration Agreement (as defined below), and any interest expense or amendment fees under any credit facility and distribution paid on any issued and outstanding preferred stock, but excluding the incentive fee).
Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, or OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not
yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income,
expressed as a percentage of the value of our net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7.00% annualized). We pay the Investment Adviser an incentive fee with
respect to our Pre-Incentive Fee Net Investment Income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which our Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 1.75%, (2) 50%
of our Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.9167% in any calendar quarter (11.67% annualized) (we refer to this
portion of our Pre-Incentive Fee Net Investment Income (which exceeds the hurdle but is less than 2.9167%) as the catch-up, which is meant to provide our Investment Adviser with 20% of our Pre-Incentive Fee Net Investment Income, as if a
hurdle did not apply, if this net investment income exceeds 2.9167% in any calendar quarter), and (3) 20% of the amount of our Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.9167% in any calendar quarter. These calculations are
pro-rated for any share issuances or repurchases during the relevant quarter, if applicable. For the years ended September 30, 2016, 2015 and 2014, the Investment Adviser earned $3.7 million, $2.2 million and $2.6 million, respectively, in
incentive fees on net investment income from us.



7



---

##### Table of Contents

The following is a graphical representation of the calculation of quarterly incentive fee based on
Pre-Incentive Fee Net Investment Income:

Pre-Incentive Fee Net Investment Income

(expressed as a percentage of the value of net assets)



LOGO

Percentage of Pre-Incentive Fee Net Investment Income

allocated to income-related portion of incentive fee

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the
Investment Management Agreement, as of the termination date) and equals 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized
capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. For the fiscal years ended September 30, 2016, 2015 and 2014 the Investment Adviser accrued an incentive fee on capital
gains of approximately zero, $(0.4) million and $0.8 million, respectively, as calculated under the Investment Management Agreement (as described above).

Under U.S. generally accepted accounting principles, or GAAP, we are required to accrue a capital gains incentive fee based upon net realized
capital gains and net unrealized capital appreciation and depreciation on investments held at the end of each period. In calculating the capital gains incentive fee accrual, we considered the cumulative aggregate unrealized capital appreciation in
the calculation, as a capital gains incentive fee would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable
under the Investment Management Agreement. This accrual is calculated using the aggregate cumulative realized capital gains and losses and cumulative unrealized capital appreciation or depreciation. If such amount is positive at the end of a period,
then we record a capital gains incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains related incentive fees paid or accrued in all prior years. If such amount is negative, then there is no accrual for such
year. There can be no assurance that such unrealized capital appreciation will be realized in the future. The incentive fee accrued for under GAAP on our unrealized and realized capital gains for the years ended September 30, 2016, 2015 and
2014 was $1.1 million, $(0.7) million and $0.1 million, respectively.

Examples of Quarterly Incentive Fee Calculation

Example 1: Income Related Portion of Incentive Fee (*):

Alternative 1:

Assumptions

Investment income (including interest, dividends, fees, etc.) = 1.25%

Hurdle(1) = 1.75%

Base management fee(2) = 0.25%

Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.20%

Pre-Incentive Fee Net Investment Income

(investment
income(base management fee + other expenses)) = 0.80%

Pre-Incentive Fee Net Investment Income does not exceed hurdle; therefore, there is no
incentive fee.

Alternative 2:

Assumptions

Investment income (including interest, dividends, fees, etc.) = 2.70%

Hurdle(1) = 1.75%

Base management fee(2) = 0.25%

Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.20%

Pre-Incentive Fee Net Investment Income

(investment
income(base management fee + other expenses)) = 2.25%

Incentive fee       = 50% ×
Pre-Incentive Fee Net Investment Income, subject to catch-up

= 50% × (2.25% - 1.75%)

= 0.25%

Alternative 3:

Assumptions

Investment income (including interest,
dividends, fees, etc.) = 4.00%

Hurdle(1) = 1.75%

Base management fee(2) = 0.25%

Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.20%



8



---

##### Table of Contents

Pre-Incentive Fee Net Investment Income

(investment income(base management fee + other expenses)) = 3.55%

Incentive fee       = 20% × Pre-Incentive Fee Net Investment Income, subject to catch-up(3)

Incentive fee       = 50% ×
catch-up + (20% × (Pre-Incentive Fee Net Investment Income - 2.9167%))

Catch-up
            = 2.9167% - 1.75%

= 1.1667%

= (50% × 1.1667%) + (20% × (3.55% - 2.9167%))

= 0.5833% + (20% × 0.6333%)

= 0.5833% + 0.1267%

= 0.71%





|* | The hypothetical amount of Pre-Incentive Fee Net Investment Income shown is based on a percentage of total net assets.
|- | ----------------------------------------------------------------------------------------------------------------------

|(1) | Represents 7.0% annualized hurdle.
|--- | ----------------------------------

|(2) | Represents 1.0% annualized base management fee.
|--- | -----------------------------------------------

|(3) | The catch-up provision is intended to provide the Investment Adviser with an incentive fee of approximately 20% on all of our Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when
our net investment income exceeds 2.9167% in any calendar quarter.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Example 2: Capital Gains Portion of Incentive Fee:

Alternative 1:

Assumptions

Year 1: $20 million investment made in Company A (Investment A), and $30 million investment made in Company B (Investment B)

Year 2: Investment A sold for $50 million and fair market value (FMV) of Investment B determined to be $32 million

Year 3: FMV of Investment B determined to be $25 million

Year 4:
Investment B sold for $31 million

The capital gains portion of the incentive fee, if any, would be:

Year 1: None

Year 2: $6 million capital gains incentive fee

$30 million realized capital gains on sale of Investment A multiplied by 20%

Year 3: None

$5 million cumulative fee (20% multiplied by $25
million ($30 million cumulative capital gains less $5 million cumulative capital depreciation)) less $6 million (previous capital gains fee paid in Year 2)

Year 4: $200,000 capital gains incentive fee $6.2 million cumulative fee ($31 million cumulative realized capital gains multiplied by 20%) less $6 million
(previous capital gains fee paid in Year 2).

Alternative 2:

Assumptions

Year 1: $20 million investment made in Company
A (Investment A), $30 million investment made in Company B (Investment B) and $25 million investment made in Company C (Investment C)

Year 2: Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25 million

Year 3: FMV of Investment B determined to be $27 million and Investment C sold for $30 million

Year 4: FMV of Investment B determined to be $35 million

Year 5:
Investment B sold for $20 million

The capital gains portion of the incentive fee, if any, would be:

Year 1: None

Year 2: $5 million capital gains incentive fee

20% multiplied by $25 million ($30 million realized capital gains on sale of Investment A less $5 million unrealized capital depreciation on Investment B)

Year 3: $1.4 million capital gains incentive fee (1)

$6.4 million cumulative fee (20% multiplied by $32 million ($35 million cumulative realized capital gains less $3 million unrealized capital depreciation)) less
$5 million (previous capital gains fee paid in Year 2)

Year 4: $0.6 million capital gains incentive fee



9



---

##### Table of Contents

$7 million cumulative fee (20% multiplied by $35 million ($35 million cumulative realized capital gains without
regard to $5 million of unrealized appreciation)) less $6.4 million (previous cumulative capital gains fee paid in Year 2 of $5 million and Year 3 of $1.4 million)

Year 5: None

$7 million cumulative fee (20% multiplied by $35
million ($35 million cumulative realized capital gains without regard to $10 million realized capital losses in subsequent year)) less $7 million (previous cumulative capital gains fee paid in Years 2, 3 and Year 4)



|(1) | As illustrated in Year 3 of Alternative 2 above, if we were to be wound up on a date other than December 31 of any year after year 3, we may have paid aggregate capital gain incentive fees that are more than the
amount of such fees that would be payable if we had been wound up on December 31 of such year.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Organization of the Investment
Adviser

PennantPark Investment Advisers is a registered investment adviser under the Investment Advisers Act of 1940, as amended,
or Advisers Act. The principal executive office of PennantPark Investment Advisers is located at 590 Madison Avenue, 15th Floor, New York, NY 10022.

Duration and Termination of Investment Management Agreement

The Investment Management Agreement was reapproved by our board of directors, including a majority of our directors who are not interested
persons of us or the Investment Adviser, in February 2016. Unless terminated earlier as described below, the Investment Management Agreement will continue in effect for a period of one year through February 2017. It will remain in effect if approved
annually by our board of directors, or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons of us or the
Investment Adviser. In determining to reapprove the Investment Management Agreement, our board of directors requested information from the Investment Adviser that enabled it to evaluate a number of factors relevant to its determination. These
factors included the nature, quality and extent of services performed by the Investment Adviser, our ability to manage conflicts of interest effectively, our short and long-term performance, our costs, including as compared to comparable externally
and internally managed publicly traded BDCs that engage in similar investing activities, our profitability and any economies of scale. Based on the information reviewed and the considerations detailed above, our board of directors, including all of
our directors who are not interested persons of us or the Investment Adviser, concluded that the investment advisory fee rates and terms are fair and reasonable in relation to the services provided and reapproved the Investment Management Agreement
as being in the best interests of our stockholders.

The Investment Management Agreement will automatically terminate in the event of its
assignment. The Investment Management Agreement may be terminated by either party without penalty upon 60 days written notice to the other. See Risk FactorsRisks Relating to our Business and StructureWe are dependent upon our
Investment Advisers key personnel for our future success, and if our Investment Adviser is unable to hire and retain qualified personnel or if our Investment Adviser loses any member of its management team, our ability to achieve our
investment objectives could be significantly harmed for more information.

Administration Agreement

We have entered into an agreement, or the Administration Agreement, with the Administrator, under which the Administrator furnishes us with
office facilities, equipment and clerical, bookkeeping and record keeping services. Under our Administration Agreement, the Administrator performs, or oversees the performance of, our required administrative services, which include, among other
activities, being responsible for the financial records we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, the Administrator assists us in determining and publishing our NAV, oversees
the preparation and filing of our tax returns and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. For providing these services, facilities and personnel, we
have agreed to reimburse the Administrator for its allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent, technology systems, insurance and our
allocable portion of the cost of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer and their respective staffs. The Administrator also offers on our behalf managerial assistance to portfolio companies to
which we are required to offer such assistance. To the extent that our Administrator outsources any of its functions, we will pay the fees associated with such functions on a direct basis without profit to the Administrator. Reimbursement for
certain of these costs is included in administrative services expenses in the Consolidated Statements of Operations. For the years ended September 30, 2016, 2015 and 2014, the Investment Adviser was reimbursed approximately $0.8 million, $0.5
million and $0.5 million, respectively, from us, including expenses the Investment Adviser incurred on behalf of the Administrator, for services described above.

Duration and Termination of Administration Agreement

The Administration Agreement was reapproved by our board of directors, including a majority of our directors who are not interested persons of
us, in February 2016. Unless terminated earlier as described below, our Administration Agreement will continue in effect for a period of one year through February 2017. It will remain in effect if approved annually by our board of directors, or by
the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons of us. The Administration Agreement may not be assigned by
either party without the consent of the other party. The Administration Agreement may be terminated by either party without penalty upon 60 days written notice to the other.

Indemnification

Our Investment
Management Agreement and Administration Agreement provide that, absent willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their duties and obligations, PennantPark
Investment Advisers and PennantPark Investment Administration and their officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with them are entitled to indemnification from us for any
damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) arising from the rendering of PennantPark Investment Advisers and PennantPark Investment Administrations
services under our Investment Management Agreement or Administration Agreement or otherwise as Investment Adviser or Administrator for us.

License
Agreement

We have entered into a license agreement, or the License Agreement, with PennantPark Investment Advisers pursuant to
which PennantPark Investment Advisers has granted us a royalty-free, non-exclusive license to use the name PennantPark. Under this agreement, we have a right to use the PennantPark name, for so long as PennantPark Investment Advisers or
one of its affiliates remains our Investment Adviser. Other than with respect to this limited license, we have no legal right to the PennantPark name.



10



---

##### Table of Contents

REGULATION

Business Development Company and Regulated Investment Company Regulations

We are a BDC under the 1940 Act, which has qualified and intends to continue to qualify to maintain an election to be treated as a RIC under
Subchapter M of the Code. The 1940 Act contains prohibitions and restrictions relating to transactions between a BDC and its affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those affiliates or
underwriters and requires that a majority of the directors be persons other than interested persons, as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to
cease to be, or to withdraw our election as, a BDC unless approved by holders of a majority of our outstanding voting securities.

We may
invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an underwriter as that term is
defined in the Securities Act of 1933, as amended, or the Securities Act. We may purchase or otherwise receive warrants to purchase the common stock of our portfolio companies in connection with acquisition financing or other investments. Similarly,
in connection with an acquisition, we may acquire rights to require the issuers of securities we own or their affiliates to repurchase them under certain circumstances. We do not intend to acquire securities issued by any investment company that
exceed the limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of any investment company, invest more than 5% of the value of our total assets in the securities of one investment company
or invest more than 10% of the value of our total assets in the securities of more than one investment company. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such
investments might subject our stockholders to additional expenses. We may enter into hedging transactions to manage the risks associated with interest rate and currency fluctuations. None of these policies are fundamental and they may be changed
without stockholder approval.

Qualifying Assets

Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are
referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDCs total assets. The principal categories of qualifying assets relevant to our business are the following:



| | (1) | Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who
is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined under the 1940 Act to
include any issuer which:
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) | is organized under the laws of, and has its principal place of business in, the United States;
| | --- | ----------------------------------------------------------------------------------------------



| | (b) | is not an investment company (other than a small business investment company wholly-owned by the BDC) or a company that would be an investment company but is excluded from the definition of an investment company by
Section 3(c) of the 1940 Act; and
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | satisfies any of the following:
| | --- | -------------------------------



| | (i) | does not have any class of securities listed on a national securities exchange;
| | --- | -------------------------------------------------------------------------------



| | (ii) | has any class of securities listed on a national securities exchange subject to a maximum market capitalization of $250.0 million; or
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | is controlled by a BDC, either alone or as part of a group acting together, and such BDC in fact exercises a controlling influence over the management or policies of such eligible portfolio company and, as a result of
such control, has an affiliated person who is a director of such eligible portfolio company.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Securities of any eligible portfolio company which we control.
| | --- | --------------------------------------------------------------



| | (3) | Securities purchased in a private transaction from a U.S. operating company or from an affiliated person of the issuer, or in transactions incidental thereto, if such issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio
company.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------

In addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose
of making investments in the types of securities described in (1), (2) or (3) above.

Managerial Assistance to Portfolio Companies

As a BDC, we are required to make available managerial assistance to our portfolio companies that constitute a qualifying asset
within the meaning of Section 55 of the 1940 Act. However, if a BDC purchases securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making
available managerial assistance means any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does provide, significant guidance and counsel concerning the management, operations or
business objectives and policies of a portfolio company. Our Administrator may provide such assistance on our behalf to portfolio companies that request such assistance. Officers of our Investment Adviser and Administrator may provide assistance to
controlled affiliates.

Temporary Investments

Pending investments in other types of qualifying assets, as described above, may consist of cash, cash equivalents, U.S. government securities
or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. We may invest in U.S. Treasury bills or in
repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the



11



---

##### Table of Contents

U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase
it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such
repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the Diversification Tests, as defined below under RegulationElection to be Treated as a
RIC, in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our Investment Adviser will monitor the creditworthiness of the
counterparties with which we may enter into repurchase agreement transactions.

Senior Securities

We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our
asset coverage, as defined in the 1940 Act and referred to as the asset coverage ratio, is compliant with the 1940 Act, immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to
prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage requirement at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of
our total assets for temporary or emergency purposes without regard to our asset coverage ratio. For a discussion of the risks associated with leverage, see Risk FactorsRisks Relating to our Business and StructureRegulations
governing our operation as a BDC will affect our ability to, and the way in which we, raise additional capital for more information.

Joint Code
of Ethics and Code of Conduct

We and PennantPark Investment Advisers have adopted a joint code of ethics pursuant to Rule 17j-1
under the 1940 Act and a code of conduct that establish procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal investment accounts,
including securities that may be purchased or held by us, so long as such investments are made in accordance with the codes requirements. Our joint code of ethics and code of conduct are available, free of charge, on our website atwww.pennantpark.com. You may read and copy the code of ethics at the SECs Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. In
addition, the joint code of ethics is attached as an exhibit to this Report and is available on the EDGAR Database on the SECs Internet site atwww.sec.gov. You may also obtain a copy of our joint code of ethics, after paying a
duplicating fee, by electronic request at the following email address:publicinfo@sec.gov, or by writing the SECs Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.

Proxy Voting Policies and Procedures

We have delegated our proxy voting responsibility to our Investment Adviser. The Proxy Voting Policies and Procedures of our Investment Adviser
are set forth below. The guidelines are reviewed periodically by our Investment Adviser and our non-interested directors, and, accordingly, are subject to change. For purposes of these Proxy Voting Policies and Procedures described below,
we, our and us refer to our Investment Adviser.

Introduction

As an investment adviser registered under the Advisers Act, we have a fiduciary duty to act solely in the best interests of our clients. As part
of this duty, we recognize that we must vote client securities in a timely manner free of conflicts of interest and in the best interests of our clients.

These policies and procedures for voting proxies for our investment advisory clients are intended to comply with Section 206 of, and Rule
206(4)-6 under, the Advisers Act.

Proxy Policies

We vote proxies relating to our portfolio securities in what we perceive to be the best interests of our stockholders. We review on a
case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by our clients. Although we will generally vote against proposals that may have a negative impact on our clients
portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons to do so.

Our proxy voting decisions are
made by the senior investment professionals who are responsible for monitoring each of our clients investments. To ensure that our vote is not the product of a conflict of interest, we require that: (1) anyone involved in the decision
making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (2) employees involved in the decision making
process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties.

Proxy Voting Records

You
may obtain information about how we voted proxies, free of charge, by calling us collect at (212) 905-1000 or by making a written request for proxy voting information to: Aviv Efrat, Chief Financial Officer and Treasurer, 590 Madison Avenue,
15th Floor, New York, New York 10022.

Privacy Protection Principles

We are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information. The following
information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information
of our stockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts
(for example, to a transfer agent or third party administrator).

We restrict access to non-public personal information about our
stockholders to employees of our Investment Adviser and its affiliates with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our
stockholders.

Our privacy protection policies are available, free of charge, on our website at www.pennantpark.com. In
addition, the privacy policy is available on the EDGAR Database on the SECs Internet site at www.sec.gov, filed as an exhibit to our annual report on Form 10-K (File No. 814-00891 filed on November 17, 2011). You may
also obtain copies of our privacy policy, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing the SECs Public Reference Section, 100 F Street, N.E., Washington,
D.C. 20549.



12



---

##### Table of Contents

Other

We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval
of our board of directors, including a majority of our directors who are not interested persons of us, and, in some cases, prior approval by the SEC.

We will be periodically examined by the SEC for compliance with the 1940 Act.

We are required by law to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and
embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved
in the conduct of such persons office.

We and PennantPark Investment Advisers have each adopted and implemented written policies and
procedures reasonably designed to prevent violation of the federal securities laws. We review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and we designate a Chief Compliance Officer to be
responsible for administering the policies and procedures.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, imposes several regulatory requirements on publicly held companies and
their insiders. Many of these requirements affect us.

For example:



| |  |  | pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, our Chief Executive Officer and Chief Financial Officer must certify the accuracy of the financial statements contained in
our periodic reports;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | pursuant to Rule 13a-15 of the Exchange Act, our management must prepare an annual report regarding its assessment of our internal controls over financial reporting; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal controls over financial reporting or in other
factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and
the regulations promulgated there-under. We continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and continue to take actions necessary to ensure that we are in compliance with that act.

Election to be Treated as a RIC

We
have elected to be treated, and intend to qualify annually to maintain our election to be treated, as a RIC under Subchapter M of the Code. To maintain our RIC tax election, we must, among other requirements, meet certain annual source-of-income and
quarterly asset diversification requirements (as described below). We also must annually distribute investment company taxable income to our stockholders of an amount generally at least equal to 90% of the sum of our ordinary income and realized net
short-term capital gains in excess of realized net long-term capital losses, or investment company taxable income and determined without regard to any deduction for dividends paid, out of the assets legally available for distribution, or the Annual
Distribution Requirement.

In order to qualify as a RIC for federal income tax purposes, we must:



| |  |  | maintain an election to be treated as a BDC under the 1940 Act at all times during each taxable year;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, net income from certain
qualified publicly traded partnerships or other income derived with respect to our business of investing in such stock or securities, or the 90% Income Test; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | diversify our holdings, or the Diversification Tests, so that at the end of each quarter of the taxable year:
| | - |  | -------------------------------------------------------------------------------------------------------------



| | 1) | at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer neither represents more
than 5% of the value of our assets nor more than 10% of the outstanding voting securities of the issuer; and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer or of two or more issuers that are controlled, as determined
under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or in certain qualified publicly traded partnerships.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax
imposed on RICs, we must distribute in respect of each calendar year dividends to our stockholders of an amount at least equal to the sum of (1) 98% of our net ordinary income (subject to certain deferrals and elections) for the calendar year,
(2) 98.2% of our capital gain net income (i.e., the excess, if any, of our capital gains over capital losses), adjusted for certain ordinary losses, generally for the one-year period ending on October 31 of the calendar year plus
(3) any net ordinary income or capital gain net income for the preceding years that was not distributed during such years, or the Excise Tax Avoidance Requirement. In addition, although we may distribute realized net capital gains (i.e., net
long-term capital gains in excess of net short-term capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we may retain and be subject to excise tax on such net capital
gains or investment company taxable income, subject to maintaining our ability to be treated as a RIC for federal income tax purposes, in order to provide us with additional liquidity.

Taxation as a RIC

If we qualify as a
RIC, and satisfy the Annual Distribution Requirement, then we will not be subject to federal income tax on the portion of our investment company taxable income and net capital gains, we distribute (or are deemed to distribute) as dividends for U.S.
federal income tax purposes to stockholders. Additionally, upon satisfying these requirements, we will be subject to U.S. federal income tax at the regular corporate rates on any investment company taxable income or net capital gains, determined
without regard to any deduction for dividends paid, that is not distributed (or not deemed to have been distributed) as dividends for U.S. federal income tax purposes to our stockholders.



13



---

##### Table of Contents

We may be required to recognize taxable income in circumstances in which we do not receive cash.
For example, if we hold a debt instrument that is treated under applicable tax rules as having OID (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or issued with warrants), we must include in income each
taxable year a portion of the OID that accrues over the life of the debt instrument, regardless of whether cash representing such income is received by us in the same taxable year. Because any OID accrued will be included in our investment company
taxable income in the taxable year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount.

We invest in below investment grade instruments. Investments in these types of instruments may present special tax issues for us. U.S. federal
income tax rules are not entirely clear about issues such as when we may cease to accrue interest, OID or market discount, when and to what extent deductions may be taken for bad debts or worthless debt instruments, how payments received on
obligations in default should be allocated between principal and income and whether exchanges of debt instruments in a bankruptcy or workout context are taxable. We will address these and other issues to the extent necessary in order to continue to
maintain our qualification to be treated as a RIC for federal income tax purposes.

Gain or loss realized by us from equity securities and
warrants acquired by us, as well as any loss attributable to the lapse of such warrants, generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular
warrant.

We are authorized to borrow funds and to sell assets in order to satisfy our Annual Distribution Requirement or the Excise Tax
Avoidance Requirement. However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt instruments and other senior securities are outstanding unless certain asset coverage requirements are met. Moreover,
our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we
dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

We may distribute our common stock as a dividend from our taxable income and a stockholder could receive a portion of such distributions
declared and distributed by us in shares of our common stock with the remaining amount in cash. A stockholder will be considered to have recognized dividend income generally equal to the fair market value of the stock paid by us plus cash received
with respect to such dividend. The total dividend declared and distributed by us would be taxable income to a stockholder even though only a small portion of the dividend was paid in cash to pay any taxes due on the total dividend. We have not yet
elected to distribute stock as a dividend but reserve the right to do so.

Failure to Qualify as a RIC

If we fail to satisfy the Annual Distribution Requirement or fail to qualify as a RIC in any taxable year, unless certain cure provisions of the
Code apply, we will be subject to tax in that taxable year on all of our taxable income at regular corporate rates, regardless of whether we make any dividend distributions to our stockholders. In that case, all of our income will be subject to
corporate-level federal income tax, reducing the amount available to be distributed to our stockholders. In contrast, assuming we qualify as a RIC, our corporate-level federal income tax should be substantially reduced or eliminated. See
Election to be Treated as a RIC above for more information.

If we are unable to maintain our status as a RIC, we also would not
be able to deduct distributions to stockholders, nor would distributions be required to be made. Distributions would generally be taxable as dividends to our stockholders as ordinary dividend income to the extent of our current and accumulated
earnings and profits. Subject to certain limitations under the Code, dividends paid by us to certain U.S. corporate stockholders would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings
and profits would be treated first as a return of capital to the extent of the stockholders tax basis in our common stock, and any remaining distributions would be treated as a capital gain. Moreover, if we fail to qualify as a RIC in any
taxable year, to qualify again to be treated as a RIC for federal income tax purposes in a subsequent taxable year, we would be required to distribute our earnings and profits attributable to any of our non-RIC taxable years as dividends to our
stockholders. In addition, if we fail to qualify as a RIC for a period greater than two consecutive taxable years, to qualify as a RIC in a subsequent taxable year we may be subject to regular corporate tax on any net built-in gains with respect to
certain of our assets (that is, the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if we had sold the property at fair market value at the end of the taxable
year) that we elect to recognize on requalification or when recognized over the next five taxable years.



14



---

##### Table of Contents

|Item 1A. | Risk Factors
|-------- | ------------

Before you invest in our securities, you
should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this Report, before you decide whether to make an investment in our
securities. The risks set out below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition
and/or operating results. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our NAV, the trading price of our common stock or any securities we may
issue, may decline, and you may lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS AND STRUCTURE

Global capital markets could enter a period of severe disruption and instability. These market conditions have historically and could again have a
materially adverse effect on debt and equity capital markets in the United States, which could have a materially negative impact on our business, financial condition and results of operations.

The U.S. and global capital markets have experienced periods of disruption characterized by the freezing of available credit, a lack of
liquidity in the debt capital markets, significant losses in the principal value of investments, the re-pricing of credit risk in the broadly syndicated credit market, the failure of major financial institutions and general volatility in the
financial markets. During these periods of disruption, general economic conditions deteriorated with material and adverse consequences for the broader financial and credit markets, and the availability of debt and equity capital for the market as a
whole, and financial services firms in particular, was reduced significantly. These conditions may reoccur for a prolonged period of time or materially worsen in the future. In addition, uncertainty regarding the United Kingdom referendum decision
to leave the European Union (the so called Brexit), continuing signs of deteriorating sovereign debt conditions in Europe and an economic slowdown in China create uncertainty that could lead to further disruptions, instability and
weakening consumer, corporate and financial confidence. We may in the future have difficulty accessing debt and equity capital markets, and a severe disruption in the global financial markets, deterioration in credit and financing conditions or
uncertainty regarding U.S. government spending and deficit levels, Brexit, European sovereign debt, Chinese economic slowdown or other global economic conditions could have a material adverse effect on our business, financial condition and results
of operations.

Volatility or a prolonged disruption in the credit markets could materially damage our business.

We are required to record our assets at fair value, as determined in good faith by our board of directors, in accordance with our valuation
policy. As a result, volatility in the capital markets may have a material adverse effect on our valuations and our NAV, even if we hold investments to maturity. Volatility or dislocation in the capital markets may depress our stock price below our
NAV per share and create a challenging environment in which to raise equity and debt capital. As a BDC, we are generally not able to issue additional shares of our common stock at a price less than our NAV without first obtaining approval for such
issuance from our stockholders and our independent directors. Additionally, our ability to incur indebtedness is limited by the asset coverage ratio requirements for a BDC, as defined under the 1940 Act. Declining portfolio values negatively impact
our ability to borrow additional funds under our Credit Facility because our NAV is reduced for purposes of the asset coverage ratio. If the fair value of our assets declines substantially, we may fail to maintain the asset coverage ratio stipulated
by the 1940 Act, which could, in turn, cause us to lose our status as a BDC and materially impair our business operations. A lengthy disruption in the credit markets could also materially decrease demand for our investments and could materially
damage our business, financial condition and results of operations.

The significant disruption in the capital markets experienced in the
past has had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. The debt capital that may be available to us in the future may be at a higher cost
and have less favorable terms and conditions than those currently in effect. If our financing costs increase and we have no increase in interest income, then our net investment income will decrease. A prolonged inability to raise capital may require
us to reduce the volume of investments we originate and could have a material adverse impact on our business, financial condition and results of operations. This may also increase the probability that other structural risks negatively impact us.
These situations may arise due to circumstances that we may be unable to control, such as a lengthy disruption in the credit markets, a severe decline in the value of the U.S. dollar, a sharp economic downturn or recession or an operational problem
that affects third parties or us, and could materially damage our business, financial condition and results of operations.

We could be subject to
reduced availability and/or mandatory prepayments under Funding Is Credit Facility.

In addition to the asset coverage ratio
requirements, our Credit Facility contains various covenants applicable to Funding I, which restricts our ability to borrow funds. For example, the income coverage covenant, or test, requires us to maintain a ratio whereby the aggregate amount of
interest received on the portfolio loans must equal at least 125% of the interest payable in respect to the Lenders and other parties. Failure to satisfy the various covenants under the Credit Facility could accelerate repayment under the Credit
Facility or otherwise prevent us from receiving distributions under the payment waterfall. This could materially and adversely affect our liquidity, financial condition and results of operations. Funding Is borrowings under the Credit Facility
are collateralized by the assets in Funding Is investment portfolio. The agreements governing the Credit Facility require Funding I to comply with certain financial and operational covenants. These covenants include:



| |  |  | A requirement to retain our status as a RIC;
| | - |  | --------------------------------------------



| |  |  | A requirement to maintain a minimum amount of stockholders equity; and
| | - |  | -----------------------------------------------------------------------



| |  |  | A requirement that our outstanding borrowings under the Credit Facility not exceed a certain percentage of the value of our portfolio.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

Our continued compliance with these covenants depends on many factors, some of which are beyond our control. A material decrease in our NAV in
connection with additional borrowings could result in an inability to comply with our obligation to restrict the level of indebtedness that we are able to incur in relation to the value of our assets or to maintain a minimum level of
stockholders equity in Funding I. This could have a material adverse effect on our operations, as it would reduce availability under the Credit Facility and could trigger mandatory prepayment obligations under the terms of the Credit Facility.

We operate in a highly competitive market for investment opportunities.

A number of entities compete with us to make the types of investments that we make in middle-market companies. We compete with public and
private funds, including other BDCs, commercial and investment banks, commercial financing companies, CLO funds and, to the extent they provide an alternative form of financing, private equity funds. Additionally, alternative investment vehicles,
such as hedge funds, also invest in middle-market companies. As a result, competition for investment opportunities at middle-market companies can be intense. Many of our potential competitors are substantially larger and have considerably greater
financial, technical and marketing resources than we do. For example, we believe some competitors have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors have higher risk tolerances
or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes
on us as a BDC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take
advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objectives.



15



---

##### Table of Contents

Participants in our industry compete on several factors, including price, flexibility in
transaction structuring, customer service, reputation, market knowledge and speed in decision-making. We do not seek to compete primarily based on the interest rates we offer, and we believe that some of our competitors may make loans with interest
rates that are lower than the rates we offer. We may lose investment opportunities if we do not match our competitors pricing, terms and structure. However, if we match our competitors pricing, terms and structure, we may experience
decreased net interest income and increased risk of credit loss.

Our borrowers may default on their payments, which may have a materially negative
effect on our financial performance.

Our primary business exposes us to credit risk, and the quality of our portfolio has a
significant impact on our earnings. Credit risk is a component of our fair valuation of our portfolio companies. Negative credit events will lead to a decrease in the fair value of our portfolio companies.

In addition, market conditions have affected consumer confidence levels, which may harm the business of our portfolio companies and result in
adverse changes in payment patterns. Increased delinquencies and default rates would negatively impact our results of operations. Deterioration in the credit quality of our portfolio could have a material adverse effect on our business, financial
condition and results of operations. If interest rates rise, some of our portfolio companies may not be able to pay the escalating interest on our loans and may default.

We make long-term loans and debt investments, which may involve a high degree of repayment risk. Our investments with a deferred interest
feature, such as OID income and PIK interest, could represent a higher credit risk than investments that must pay interest in full in cash on a regular basis. We invest in companies that may have limited financial resources, typically are highly
leveraged and may be unable to obtain financing from traditional sources. Accordingly, a general economic downturn or severe tightening in the credit markets could materially impact the ability of our borrowers to repay their loans, which could
significantly damage our business. Numerous other factors may affect a borrowers ability to repay its loan, including the failure to meet its business plan or a downturn in its industry. A portfolio companys failure to satisfy financial
or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans or foreclosure on the secured assets. This could trigger cross-defaults under other agreements and jeopardize our portfolio
companys ability to meet its obligations under the loans or debt securities that we hold. In addition, our portfolio companies may have, or may be permitted to incur, other debt that ranks senior to or equally with our securities. This means
that payments on such senior-ranking securities may have to be made before we receive any payments on our subordinated loans or debt securities. Deterioration in a borrowers financial condition and prospects may be accompanied by deterioration
in any related collateral and may have a material adverse effect on our financial condition and results of operations.

Any unrealized losses we
experience on our investment portfolio may be an indication of future realized losses, which could reduce our income available for distribution.

As a BDC, we are required to carry our investments at fair value, which is derived from a market value or, if no market value is ascertainable
or if market value does not reflect the fair value of such investment in the bona fide determination of our board of directors, then we would carry our investments at fair value as determined in good faith by or under the direction of our board of
directors. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation or loss. Unrealized losses of any given portfolio company could be an indication of such companys inability in the future to
meet its repayment obligations to us.

If the fair value of our portfolio companies reflects unrealized losses that are subsequently
realized, we could experience reductions of our income available for distribution in future periods that could materially harm our results of operations and cause a material decline in the value of our publicly traded common stock.

We may be the target of litigation.

We may be the target of securities litigation in the future, particularly if the trading price of our common stock fluctuates significantly. We
could also generally be subject to litigation, including derivative actions by our stockholders. Any litigation could result in substantial costs and divert managements attention and resources from our business and cause a material adverse
effect on our business, financial condition and results of operations.

We are dependent upon our Investment Advisers key personnel for our
future success, and if our Investment Adviser is unable to hire and retain qualified personnel or if our Investment Adviser loses any member of its management team, our ability to achieve our investment objectives could be significantly harmed.

We depend on the diligence, skill and network of business contacts of the senior investment professionals of our Investment Adviser
for our future success. We also depend, to a significant extent, on PennantPark Investment Advisers access to the investment information and deal flow generated by these senior investment professionals and any others that may be hired by
PennantPark Investment Advisers. Subject to the overall supervision of our board of directors, the managers of our Investment Adviser evaluate, negotiate, structure, close and monitor our investments. Our future success depends on the continued
service of management personnel of our Investment Adviser. The departure of managers of PennantPark Investment Advisers could have a material adverse effect on our ability to achieve our investment objectives. In addition, we can offer no assurance
that PennantPark Investment Advisers will remain our Investment Adviser. The Investment Adviser has the right, under the Investment Management Agreement, to resign at any time upon 60 days written notice, whether we have found a replacement or
not.

If our Investment Management Agreement is terminated, our costs under new agreements that we enter into may increase. In addition, we
will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Management Agreement. Any new investment management agreement would also be subject to approval by our
stockholders.

We are exposed to risks associated with changes in interest rates that may affect our cost of capital and net
investment income.

Since we borrow money to make investments, our net investment income depends, in part, upon the difference
between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In
periods of rising interest rates, our cost of funds will increase and the interest rate on investments with an interest rate floor will not increase until interest rates exceed the applicable floor, which will reduce our net investment income. We
may use interest rate risk management techniques, such as total return swaps and interest rate swaps, in an effort to limit our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the
extent permitted by the 1940 Act and applicable commodities laws. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in
interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. Also, we have limited experience in entering into hedging transactions and we will initially have to purchase
or develop such expertise, which may diminish the actual benefits of any hedging strategy we employ. See Managements Discussion and Analysis of Financial Condition and Results of OperationsQuantitative and Qualitative Disclosures
about Market Risk for more information.

A rise in the general level of interest rates can be expected to lead to higher interest
rates applicable to our debt investments once the interest rate exceeds the applicable floor. Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee hurdle and may result in a substantial increase
of the amount of incentive fees payable to our Investment Adviser with respect to Pre-Incentive Fee Net Investment Income.



16



---

##### Table of Contents

General interest rate fluctuations may have a substantial negative impact on our investments, the
value of our common stock and our rate of return on invested capital. A reduction in interest rates may result in both lower interest rates on new investments and higher repayments on current investments with higher interest rates, which may have an
adverse impact on our net investment income. An increase in interest rates could decrease the value of any investments we hold which earn fixed interest rates or are subject to interest rate floors and also could increase our interest expense on our
Credit Facility, thereby decreasing our net investment income. Also, an increase in interest rates available to investors could make an investment in our common stock less attractive if we are not able to increase our dividend rate, which could
reduce the value of our common stock.

Our financial condition and results of operation depend on our ability to manage future growth effectively.

Our ability to achieve our investment objectives depends on our ability to grow, which depends, in turn, on our Investment
Advisers ability to identify, invest in and monitor companies that meet our investment selection criteria. Accomplishing this result on a cost-effective basis is largely a function of our Investment Advisers structuring of the investment
process, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms. The management team of PennantPark Investment Advisers has substantial responsibilities under our Investment
Management Agreement. In order for us to grow, our Investment Adviser will need to hire, train, supervise and manage new employees. However, we can offer no assurance that any current or future employees will contribute effectively to the work of,
or remain associated with, the Investment Adviser. We caution you that the principals of our Investment Adviser or Administrator may also be called upon to provide and currently do provide managerial assistance to portfolio companies and other
investment vehicles, including other BDCs, which are managed by the Investment Adviser. Such demands on their time may distract them or slow our rate of investment. Any failure to manage our future growth effectively could have a material adverse
effect on our business, financial condition and results of operations.

We are highly dependent on information systems and systems failures could have
a material adverse effect on our business, financial condition and results of operations.

Our business depends on the
communications and information systems, including financial and accounting systems, of the Investment Adviser, the Administrator and our sub-administrator. Any failure or interruption of such systems could cause delays or other problems in our
activities. This, in turn, could have a material adverse effect on our business, financial condition and results of operations.

We may not replicate
the historical performance of other investment companies and funds with which our senior and other investment professionals have been affiliated.

The 1940 Act imposes numerous constraints on the investment activities of BDCs. For example, BDCs are required to invest at least 70% of their
total assets primarily in securities of U.S. private companies or thinly traded public companies (public companies with a market capitalization of less than $250 million), cash, cash equivalents, U.S. government securities and high-quality debt
investments that mature in one year or less. These constraints may hinder the Investment Advisers ability to take advantage of attractive investment opportunities and to achieve our investment objectives. In addition, the investment philosophy
and techniques used by the Investment Adviser may differ from those used by other investment companies and funds advised by the Investment Adviser. Accordingly, we can offer no assurance that we will replicate the historical performance of other
investment companies and funds with which our senior and other investment professionals have been affiliated, and we caution that our investment returns could be substantially lower than the returns achieved by such other companies.

Any failure on our part to maintain our status as a BDC would reduce our operating flexibility.

If we do not remain a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially
more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility, which could have a material adverse effect on our business, financial condition and results of operations.

Loss of RIC tax status would substantially reduce our net assets and income available for debt service and distributions.

We have operated and continue to operate so as to maintain our election to be treated as a RIC under Subchapter M of the Code. If we meet the
annual source of income, Diversification Tests, and Annual Distribution Requirement, we generally will not be subject to corporate-level income taxation on income we timely distribute, or deem to distribute, as dividends for U.S. federal income tax
purposes to our stockholders. We would cease to qualify for such tax treatment if we were unable to comply with these requirements. In addition, we may have difficulty meeting our Annual Distribution Requirement to our stockholders because, in
certain cases, we may recognize income before or without receiving cash representing such income. If we fail to qualify as a RIC, we will have to pay corporate-level taxes on all of our income whether or not we distribute it, which would
substantially reduce the amount of income available for debt service as well as reduce and/or affect the character and amount of our distributions to our stockholders. Even if we qualify as a RIC, we generally will be subject to a 4% nondeductible
excise tax if we do not distribute to our stockholders in respect of each calendar year of an amount at least equal to the sum of (1) 98% of our net ordinary income (subject to certain deferrals and elections) for the calendar year,
(2) 98.2% of our capital gain net income (adjusted for certain ordinary losses) generally for the one-year period ending on October 31 of the calendar year plus (3) any net ordinary income or capital gain net income for preceding
years that was not distributed during such years.

We may have difficulty paying our Annual Distribution Requirement if we recognize income before or
without receiving cash representing such income.

For federal income tax purposes, we include in income certain amounts that we have
not yet received in cash, such as OID and PIK interest, which represents interest added to the loan balance and due at the end of the loan term. OID, which could be significant relative to our overall investment assets, and increases in loan
balances as a result of PIK interest will be included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash, such as amounts attributable to
foreign currency transactions. Our investments with a deferred interest feature, such as PIK interest, may represent a higher credit risk than loans for which interest must be paid in full in cash on a regular basis. For example, even if the
accounting conditions for income accrual are met, the borrower could still default when our actual collection is scheduled to occur upon maturity of the obligation.

The part of the incentive fee payable by us that relates to our net investment income is computed and paid on income that may include interest
that has been accrued but not yet received in cash. If a portfolio company defaults on a loan that is structured to provide PIK or OID interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become
uncollectible.

In some cases, we may recognize income before or without receiving cash representing such income. As a result, we may have
difficulty meeting the Annual Distribution Requirement. Accordingly, we may have to sell some of our investments at times or prices we would not consider advantageous, or raise additional debt or equity capital or reduce new investment originations
to meet these distribution requirements, which could have a material adverse effect on our business, financial condition and results of operations. If we are not able to obtain cash from other sources, we may lose our RIC tax status and thus be
subject to corporate-level income tax.



17



---

##### Table of Contents

Because we intend to distribute substantially all of our income to our stockholders to maintain our tax
status as a RIC, we will need to raise additional capital to finance our growth. If funds are not available to us, we may need to curtail new investments, and our common stock value could decline.

In order to satisfy the requirements to be treated as a RIC for federal income tax purposes, we intend to distribute to our stockholders
substantially all of our investment company taxable income and net capital gains each taxable year. However, we may retain all or a portion of our net capital gains and pay applicable income taxes with respect thereto and elect to treat such
retained net capital gains as deemed dividend distributions to our stockholders.

As a BDC, we generally are required to meet a 200% asset
coverage ratio of total assets to total senior securities, which includes all of our borrowings, and any preferred stock we may issue in the future. This requirement limits the amount we may borrow. If the value of our assets declines, we may be
unable to satisfy this test. If that happens, we may be required to sell a portion of our investments or sell additional common stock and, depending on the nature of our leverage, to repay a portion of our indebtedness at a time when such sales and
repayments may be disadvantageous. In addition, the issuance of additional securities could dilute the percentage ownership of our current stockholders in us.

We are partially dependent on our subsidiary Funding I for cash distributions to enable us to meet the RIC distribution requirements. Funding I
may be limited by its covenants from making certain distributions to us that may be necessary to fulfill our requirements to be treated as a RIC for federal income tax purposes. We may have to request a waiver of these covenants restrictions
for Funding I to make certain distributions to enable us to be treated as a RIC for federal income tax purposes. We cannot assure you that Funding I will be granted such a waiver, and if Funding I is unable to obtain a waiver, compliance with the
covenants may cause us to incur a corporate-level income tax.

Regulations governing our operation as a BDC will affect our ability to, and the way in
which we, raise additional capital.

Our business requires a substantial amount of capital. We may acquire additional capital from
the issuance of additional senior securities or other indebtedness, the issuance of additional shares of our common stock, the issuance of warrants or subscription rights to purchase certain of our securities, or from securitization transactions.
However, we may not be able to raise additional capital in the future on favorable terms or at all. We may issue debt securities or preferred securities, which we refer to collectively as senior securities, and we may borrow money from
banks, or other financial institutions, up to the maximum amount permitted by the 1940 Act. Under the 1940 Act, the asset coverage ratio requirements permit us to issue senior securities or incur indebtedness subject to certain limits. Our ability
to pay distributions or issue additional senior securities would be restricted if our asset coverage ratio was not met. If the value of our assets declines, we may be unable to satisfy the asset coverage ratio. If that happens, we may be required to
liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales may be disadvantageous, which could materially damage our business, financial condition and results of operations.



| |  |  | Senior Securities. As a result of issuing senior securities, we are exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred securities, they would rank
senior to common stock in our capital structure. Preferred stockholders would have separate voting rights and may have rights, preferences or privileges more favorable than those of holders of our common stock. Furthermore, the issuance
of preferred securities could have the adverse effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for our common stockholders or otherwise be in your best interest. Our senior
securities may include conversion features that cause them to bear risks more closely associated with an investment in our common stock.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Additional Common Stock.Our board of directors may decide to issue common stock to finance our operations rather than issuing debt or other senior securities. As a BDC, we are generally not able to issue
our common stock at a price below NAV per share without first obtaining certain approvals from our stockholders and our board of directors. Also, subject to the requirements of the 1940 Act, we may issue rights to acquire our common stock at a price
below the current NAV per share of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our common stockholders. In any such case, the price at which our securities are to be issued
and sold may not be less than a price, that in the determination of our board of directors, closely approximates the market value of such securities. However, when required to be undertaken, the procedures used by the board of directors to determine
the NAV per share of our common stock within 48 hours of each offering of our common stock may differ materially from and will necessarily be more abbreviated than the procedures used by the board of directors to determine the NAV per share of our
common stock at the end of each quarter because there is an extensive process each quarter to determine the NAV per share of our common stock which cannot be completed in 48 hours. Such procedures may yield a NAV that is less precise than the NAV
determined at the end of each quarter. We will not offer transferable subscription rights to our stockholders at a price equivalent to less than the then current NAV per share of common stock, excluding underwriting commissions, unless we first file
a post-effective amendment that is declared effective by the SEC with respect to such issuance and the common stock to be purchased in connection with such rights represents no more than one-third of our outstanding common stock at the time such
rights are issued. In addition, for us to file a post-effective amendment to a registration statement on Form N-2, we must then be qualified to register our securities under the requirements of Form S-3. We may actually issue shares above or below a
future NAV. If we raise additional funds by issuing more common stock or warrants or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our common stockholders at that time would decrease, and our
common stockholders would experience voting dilution.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Securitization. In addition to issuing securities to raise capital as described above, we anticipate that in the future, as market conditions permit, we may securitize our loans to generate cash for
funding new investments. To securitize loans, we may create a wholly-owned subsidiary, contribute a pool of loans to the subsidiary and have the subsidiary issue primarily investment grade debt securities to purchasers who we would expect to be
willing to accept a substantially lower interest rate than the loans earn. Even though we expect the pool of loans that we contribute to any such securitization vehicle to be rated below investment grade, because the securitization vehicles
portfolio of loans would secure all of the debt issued by such vehicle, a portion of such debt may be rated investment grade, subject in each case to market conditions that may require such portion of the debt to be over collateralized and various
other restrictions. If applicable accounting pronouncements or SEC staff guidance require us to consolidate the securitization vehicles financial statements with our financial statements, any debt issued by it would be generally treated as if
it were issued by us for purposes of the asset coverage ratio applicable to us. In such case, we would expect to retain all or a portion of the equity and/or subordinated notes in the securitization vehicle. Our retained equity would be exposed to
any losses on the portfolio of loans before any of the debt securities would be exposed to such losses. Accordingly, if the pool of loans experienced a low level of losses due to defaults, we would earn an incremental amount of income on our
retained equity but we would be exposed, up to the amount of equity we retained, to that proportion of any losses we would have experienced if we had continued to hold the loans in our portfolio. We may hold subordinated debentures in any such
securitization vehicle and, if so, we would not consider such securities to be senior securities. An inability to successfully securitize our loan portfolio could limit our ability to grow our business and fully execute our business strategy and
adversely affect our earnings, if any. Moreover, the successful securitization of a portion of our loan portfolio might expose us to losses as the residual loans in which we do not sell interests will tend to be those that are riskier and less
liquid.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



---

##### Table of Contents

We currently use borrowed funds to make investments and are exposed to the typical risks associated with
leverage.

Because we borrow funds through Funding I to make investments, we are exposed to increased risk of loss due to our use of
debt to make investments. A decrease in the value of our investments will have a greater negative impact on the NAV attributable to our common stock than it would if we did not use debt. Our ability to pay distributions may be restricted when our
asset coverage ratio is not met and any cash that we use to service our indebtedness is not available for distribution to our common stockholders.

Our current debt is governed by the terms of the Credit Facility and future debt may be governed by an indenture or other instrument containing
covenants restricting our operating flexibility. We, and indirectly our stockholders, bear the cost of issuing and servicing debt. Any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges
more favorable than those of our common stock and may also carry leverage related risks.

If we incur additional debt, it could increase the risk of
investing in our shares.

We have indebtedness outstanding pursuant to our Credit Facility and expect in the future to borrow
additional amounts under our Credit Facility or other debt securities, subject to market availability, and, may increase the size of our Credit Facility. We cannot assure you that our leverage will remain at current levels. The amount of leverage
that we employ will depend upon our assessment of the market and other factors at the time of any proposed borrowing. Lenders have fixed dollar claims on our assets that are superior to the claims of our common stockholders or preferred
stockholders, if any, and we have granted a security interest in Funding Is assets in connection with our Credit Facility borrowings. In the case of a liquidation event, those lenders would receive proceeds before our stockholders. Any future
debt issuance will increase our leverage and may be subordinate to our Credit Facility. In addition, borrowings or debt issuances, also known as leverage, magnify the potential for loss or gain on amounts invested and, therefore, increase the risks
associated with investing in our securities. Leverage is generally considered a speculative investment technique. If the value of our assets decreases, then leveraging would cause the NAV attributable to our common stock to decline more than it
otherwise would have had we not utilized leverage. Similarly, any decrease in our revenue would cause our net income to decline more than it would have had we not borrowed funds and could negatively affect our ability to make distributions on our
common or preferred stock. Our ability to service any debt that we incur depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures.

As of September 30, 2016, we had outstanding borrowings of $232.9 million under our Credit Facility with a current interest rate of 2.57%
exclusive of the fees on the undrawn commitment. To cover the annual interest on our borrowings of $232.9 million outstanding at September 30, 2016, at the weighted average annual rate of 2.57%, we would have to receive an annual yield of at
least 0.98%. This example is for illustrative purposes only, and actual interest rates on our Credit Facility or any future borrowings are likely to fluctuate. The costs associated with our borrowings, including any increase in the management fee or
incentive fee payable to our Investment Adviser, are and will be borne by our common stockholders.

The following table is designed to
illustrate the effect on the return to a holder of our common stock of the leverage created by our use of borrowing at September 30, 2016 of 37% of total assets (including such borrowed funds), at the current interest rate at the time of 2.57%,
and assumes hypothetical annual returns on our portfolio of minus 10 to plus 10 percent. The table also assumes that we will maintain a constant level of leverage and weighted average interest rate. The amount of leverage and cost of borrowing that
we use will vary from time to time. As can be seen, leverage generally increases the return to stockholders when the portfolio return is positive and decreases return when the portfolio return is negative. Actual returns may be greater or less than
those appearing in the table.



|                                                  |  |  |       |    |  |  |       |    |  |  |      |    |  |  |     |   |  |  |      |  
|------------------------------------------------- |  |  | ----- | -- |  |  | ----- | -- |  |  | ---- | -- |  |  | --- | - |  |  | ---- | -
|Assumed return on portfolio (net of expenses)
(1) |  |  | (10.0 | )% |  |  | (5.0  | )% |  |  |     | %  |  |  | 5.0 | % |  |  | 10.0 | %
|Corresponding return to common stockholders
(2)   |  |  | (18.4 | )% |  |  | (10.0 | )% |  |  | (1.6 | )% |  |  | 6.8 | % |  |  | 15.2 | %



|(1) | The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In order to compute the corresponding return to common stockholders, the assumed return on portfolio is multiplied by the total value of our
assets at the beginning of the period to obtain an assumed return to us. From this amount, all interest expense expected to be accrued during the period is subtracted to determine the return available to stockholders. The return available to
stockholders is then divided by the total value of our net assets as of the beginning of the period to determine the corresponding return to common stockholders.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We may in the future determine to fund a portion of our investments with debt securities, which would magnify the potential for loss and the risks of
investing in us.

As a result of any issuance of debt securities, we would be exposed to typical risks associated with leverage,
including an increased risk of loss and an increase in expenses, which are ultimately borne by our common stockholders. Payment of interest on such debt securities must take preference over any other distributions or other payments to our common
stockholders. If we issue debt securities in the future, it is likely that such securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. In addition, such securities may be rated by
rating agencies, and in obtaining a rating for such securities, we may be required to abide by operating and investment guidelines that could further restrict our operating flexibility. Furthermore, any cash that we use to service our indebtedness
would not be available for the payment of distributions to our common stockholders.

Our credit ratings may not reflect all risks of an investment in
our debt securities.

Our credit ratings, if any, are an assessment of our ability to pay our obligations. Consequently, real or
anticipated changes in our credit ratings will generally affect the market value of any publicly issued debt securities. Our credit ratings, generally may not reflect the potential impact of risks related to market conditions or other factors
discussed above on the market value of, or trading market for, any publicly issued debt securities.

Market conditions may make it difficult to extend
the maturity of or refinance our existing indebtedness and any failure to do so would have a material adverse effect on our business.

Our Credit Facility expires in August 2020. We utilize proceeds from the Credit Facility to make investments in our portfolio companies. The
duration of many of our investments exceeds the duration of our indebtedness under our Credit Facility. This means that we will have to extend the maturity of our Credit Facility or refinance our indebtedness under our Credit Facility in order to
avoid selling investments at maturity of the Credit Facility, at which time such sales may be at prices that are disadvantageous to us, which could materially damage our business. In addition, future market conditions may affect our ability to renew
or refinance our Credit Facility on terms as favorable as those in our existing Credit Facility. If we fail to extend or refinance the indebtedness outstanding under our Credit Facility by the time it becomes due and payable, the administrative
agent of the Credit Facility may elect to exercise various remedies, including the sale of all or a portion of the collateral securing the Credit Facility, subject to certain restrictions, any of which could have a material adverse effect on our
business, financial condition and results of operations. The illiquidity of our investments may make it difficult for us to sell such investments. If we are required to sell our investments on short-term notice, we may not receive the value that we
have recorded for such investments, and this could materially affect our results of operations.



19



---

##### Table of Contents

We may in the future determine to fund a portion of our investments with preferred stock, which is another
form of leverage and would magnify the potential for loss and the risks of investing in us.

Preferred stock, which is another form
of leverage, has the same risks to our common stockholders as borrowings because the dividends on any preferred stock we issue must be cumulative. If we issue preferred securities they would rank senior to common stock in our capital
structure. Payment of dividends on, and repayment of the liquidation preference of, such preferred stock would typically take preference over any dividends or other payments to our common stockholders. Also, preferred stockholders are not typically
subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference. Furthermore, preferred stockholders would have separate voting rights and may have rights, preferences
or privileges more favorable than those of our common stockholders. Also, the issuance of preferred securities could have the adverse effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price
for our common stockholders or otherwise be in your best interest.

Our interests in Funding I are subordinated.

We own 100% of the equity interests in Funding I. We consolidate Funding I in our Consolidated Financial Statements and treat the indebtedness
of Funding I as our leverage. Our interests in Funding I (other than the management fees that the Investment Adviser has irrevocably directed to be paid to us) are subordinate in priority of payment to every other obligation of Funding I and are
subject to certain payment restrictions set forth in the Credit Facility documents. We may receive cash distributions on our equity interests in Funding I only after it has made all (1) required cash interest and, if applicable, principal
payments to the Lenders, (2) required administrative expenses and (3) claims of other unsecured creditors of Funding I. We cannot assure you that there will be sufficient funds available to make any distributions to us or that such
distributions will meet our expectations.

Our equity interests in Funding I are subordinate to all of the secured and unsecured creditors,
known or unknown, of Funding I, including the Lenders. Consequently, to the extent that the value of Funding Is portfolio of loan investments has been reduced as a result of conditions in the credit markets, defaulted loans, capital losses
exceeding gains on the underlying assets, prepayments or changes in interest rates, the return on our investment in Funding I could be reduced. Accordingly, our investment in Funding I is subject to a complete risk of loss.

We may not receive cash on our equity interests from Funding I.

Except for management fees that PennantPark Investment Advisers has irrevocably directed to be paid to us, we receive cash from Funding I only
to the extent that we receive distributions on our equity interests in Funding I. Funding I may make equity distributions on such interests only to the extent permitted by the payment priority provisions of the Credit Facility. The Credit Facility
generally provides that payments on such interests may not be made on any payment date unless all amounts owing to the Lenders and other secured parties are paid in full. In the event that we fail to receive cash from Funding I, we could be unable
to make distributions to our stockholders in amounts sufficient to maintain our qualification as a RIC. We also could be forced to sell investments in portfolio companies at less than their fair value in order to continue making such distributions.

There are significant potential conflicts of interest which could impact our investment returns.

The professionals of the Investment Adviser and Administrator may serve as officers, directors or principals of entities that operate in the
same or a related line of business as we do or of investment funds managed by affiliates of us that currently exist or may be formed in the future. The Investment Adviser and Administrator may be engaged by such funds at any time and without the
prior approval of our stockholders or our board of directors. Our board of directors monitors any potential conflict that may arise upon such a development. Accordingly, if this occurs, they may have obligations to investors in those entities, the
fulfillment of which might not be in the best interests of us or our stockholders. Currently, the executive officers and directors, as well as the current senior investment professionals of the Investment Adviser, may serve as officers and directors
of our affiliated funds. In addition, we note that any affiliated investment vehicles currently formed or formed in the future and managed by the Investment Adviser or its affiliates may have overlapping investment objectives with our own and,
accordingly, may invest in asset classes similar to those targeted by us. As a result, the Investment Adviser may face conflicts in allocating investment opportunities between us and such other entities. Although the Investment Adviser will endeavor
to allocate investment opportunities in a fair and equitable manner, it is possible that, in the future, we may not be given the opportunity to participate in investments made by investment funds managed by the Investment Adviser or an investment
manager affiliated with the Investment Adviser. In any such case, when the Investment Adviser identifies an investment, it is forced to choose which investment fund should make the investment. We may co-invest on a concurrent basis with any other
affiliates that the Investment Adviser currently has or forms in the future, subject to compliance with applicable regulations and regulatory guidance and our allocation procedures.

In the ordinary course of our investing activities, we pay investment advisory and incentive fees to the Investment Adviser, and reimburse the
Investment Adviser for certain expenses it incurs. As a result, investors in our common stock invest on a gross basis and receive distributions on a net basis after expenses, resulting in a lower rate of return than an
investor might achieve through direct investments. Accordingly, there may be times when the management team of the Investment Adviser has interests that differ from those of our stockholders, giving rise to a conflict.

We have entered into a License Agreement with PennantPark Investment Advisers, pursuant to which the Investment Adviser has agreed to grant us a
royalty-free non-exclusive license to use the name PennantPark. The License Agreement will expire (i) upon expiration or termination of the Investment Management Agreement, (ii) if the Investment Adviser ceases to serve as our
investment adviser, (iii) by either party upon 60 days written notice or (iv) by the Investment Adviser at any time in the event we assign or attempt to assign or sublicense the License Agreement or any of our rights or duties
thereunder without the prior written consent of the Investment Adviser. Other than with respect to this limited license, we have no legal right to the PennantPark name.

In addition, we pay PennantPark Investment Administration, an affiliate of the Investment Adviser, our allocable portion of overhead and other
expenses incurred by PennantPark Investment Administration in performing its obligations under the Administration Agreement, including rent and our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their
respective staffs. These arrangements may create conflicts of interest that our board of directors must monitor.

We may experience fluctuations in
our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including
the interest rate payable on the debt securities we acquire, the default rate on such securities, the level of our expenses, variations in, and the timing of the recognition of, realized and unrealized gains or losses, the degree to which we
encounter competition in our markets and general economic conditions. However, as a result of our irrevocable election to apply the fair value option to our Credit Facility future decreases of fair value of our debt is expected to have a
corresponding increase to our NAV. Similarly, future increases in the fair value of our debt may have a corresponding decrease to our NAV. Any future indebtedness that we elect the fair value option for may have similar effects on our NAV as our
Credit Facility. This is expected to mitigate volatility in our earnings and NAV. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.



20



---

##### Table of Contents

Holders of any preferred stock that we may issue will have the right to elect members of the board of
directors and have class voting rights on certain matters.

The 1940 Act requires that holders of shares of preferred stock must be
entitled as a class to elect two directors at all times and to elect a majority of the directors if distributions on such preferred stock are in arrears by two years or more, until such arrearage is eliminated. In addition, certain matters under the
1940 Act require the separate vote of the holders of any issued and outstanding preferred stock, including conversion to open-end status and, accordingly, preferred stockholders could veto any such changes in addition to any ability of common and
preferred stockholders, voting together as a single class, to veto such matters. Restrictions imposed on the declarations and payment of distributions to the holders of our common stock and preferred stock, both by the 1940 Act and by requirements
imposed by rating agencies, might impair our ability to maintain our qualification as a RIC for U.S. federal income tax purposes, which could have a material adverse effect on our business, financial condition and results of operations.

We may in the future issue securities for which there is no public market and for which we expect no public market to develop.

In order to raise additional capital, we may issue debt or other securities for which no public market exists, and for which no
public market is expected to develop. If we issue shares of our common stock as a component of a unit security, we would expect the common stock to separate from the other securities in such unit after a period of time or upon occurrence of an event
and to trade publicly on the NASDAQ Global Select Market, which may cause volatility in our publicly traded common stock. To the extent we issue securities for which no public market exists and for which no public market develops, a purchaser of
such securities may not be able to liquidate the investment without considerable delay, if at all. If a market should develop for our debt and other securities, the price may be highly volatile, and our debt and other securities may lose value.

If we issue preferred stock, debt securities or convertible debt securities the NAV and market value of our common stock may become more
volatile.

We cannot assure you that the issuance of preferred stock and/or debt securities would result in a higher yield or return
to the holders of our common stock. The issuance of preferred stock, debt securities and/or convertible debt would likely cause the NAV and market value of our common stock to become more volatile. If the dividend rate on the preferred stock, or the
interest rate on the debt securities, were to approach the net rate of return on our investment portfolio, the benefit of leverage to the holders of our common stock would be reduced or entirely eliminated. If the dividend rate on the preferred
stock, or the interest rate on the debt securities, were to exceed the net rate of return on our portfolio, the use of leverage would result in a lower rate of return to the holders of common stock than if we had not issued the preferred stock or
debt securities. Any decline in the NAV of our investment would be borne entirely by the holders of our common stock. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greater decrease in NAV to the
holders of our common stock than if we were not leveraged through the issuance of preferred stock, debt securities or convertible debt. This decline in NAV would also tend to cause a greater decline in the market price for our common stock.

There is also a risk that, in the event of a sharp decline in the value of our net assets, we would be in danger of failing to maintain required
asset coverage ratios or other covenants which may be required by the preferred stock, debt securities and/or convertible debt or risk a downgrade in the ratings of the preferred stock, debt securities and/or convertible debt or our current
investment income might not be sufficient to meet the dividend requirements on the preferred stock or the interest payments on the debt securities. In order to counteract such an event, we might need to liquidate investments in order to fund
redemption of some or all of the preferred stock, debt securities or convertible debt. In addition, we would pay (and the holders of our common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the
preferred stock, debt securities, convertible debt or any combination of these securities. Holders of preferred stock, debt securities, convertible debt or any combination of these securities may have different interests than holders of common stock
and may at times have disproportionate influence over our business.

The ability to sell investments held by Funding I is limited.

The Credit Facility places restrictions on the collateral managers ability to sell investments. As a result, there may be times or
circumstances during which the collateral manager is unable to sell investments or take other actions that might be in our best interests.

The trading
market or market value of any publicly issued debt or convertible debt securities may be volatile.

If we publicly issue debt or
convertible debt securities, they initially will not have an established trading market. We cannot assure investors that a trading market for our publicly issued debt or convertible debt securities would develop or be maintained if developed. In
addition to our creditworthiness, many factors may have a material adverse effect on the trading market for, and market value of, our publicly issued debt or convertible debt securities.

These factors include the following:



| |  |  | the time remaining to the maturity of these debt securities;
| | - |  | ------------------------------------------------------------



| |  |  | the outstanding principal amount of debt securities with terms identical or similar to these debt securities;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | the supply of debt securities trading in the secondary market, if any;
| | - |  | ----------------------------------------------------------------------



| |  |  | the redemption, repayment or convertible features, if any, of these debt securities;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the level, direction and volatility of market interest rates; and
| | - |  | -----------------------------------------------------------------



| |  |  | market rates of interest higher or lower than rates borne by the debt securities.
| | - |  | ---------------------------------------------------------------------------------

There also
may be a limited number of buyers for our debt securities. This too may have a material adverse effect on the market value of the debt securities or the trading market for the debt securities. Our debt securities may include convertible features
that cause them to more closely bear risks associated with an investment in our common stock.

Terms relating to debt redemption may have a material
adverse effect on the return on any debt securities.

If we issue debt securities that are redeemable at our option, we may choose
to redeem the debt securities at times when prevailing interest rates are lower than the interest rate paid on the debt securities. In addition, if the debt securities are subject to mandatory redemption, we may be required to redeem the debt
securities at times when prevailing interest rates are lower than the interest rate paid on the debt securities. In this circumstance, a holder of our debt securities may not be able to reinvest the redemption proceeds in a comparable security at an
effective interest rate as high as the debt securities being redeemed.

If we issue subscription rights or warrants for our common stock, your
interest in us may be diluted as a result of such rights or warrants offering.

Stockholders who do not fully exercise rights or
warrants issued to them in an offering of subscription rights or warrants to purchase our common stock should expect that they will, at the completion of an offering, own a smaller proportional interest in us than would otherwise be the case if they
fully exercised their rights or warrants. We cannot state precisely the amount of any such dilution in share ownership because we do not know what proportion of the common stock would be purchased as a result of any such offering.



21



---

##### Table of Contents

In addition, if the subscription price or warrant exercise price is less than our NAV per share of
common stock at the time of an offering, then our stockholders would experience an immediate dilution of the aggregate NAV of their shares as a result of the offering. The amount of any such decrease in NAV is not predictable because it is not known
at this time what the subscription price, warrant exercise price or NAV per share will be on the expiration date of such rights offering or what proportion of our common stock will be purchased as a result of any such offering.

The impact of recent financial reform legislation on us is uncertain.

In light of current conditions in the U.S. and global financial markets and the U.S. and global economy, legislators, the presidential
administration and regulators have increased their focus on the regulation of the financial services industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, became effective in 2010. Although many provisions
of the Dodd-Frank Act have delayed effectiveness or will not become effective until the relevant federal agencies issue new rules to implement the Dodd-Frank Act, the Dodd-Frank Act may nevertheless have a material adverse impact on the financial
services industry as a whole and on our business, financial condition and results of operations. Accordingly, we are continuing to evaluate the effect the Dodd-Frank Act or implementing its regulations will have on our business, financial condition
and results of operations.

Changes in laws or regulations governing our operations or those of our portfolio companies may adversely affect our
business.

We and our portfolio companies are subject to laws and regulation at the local, state and federal levels. These laws and
regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations that govern our operations or those of our portfolio companies could have a material adverse effect on our business,
financial condition and results of operations. See BusinessRegulation for more information.

Our board of directors may change our
investment objectives, operating policies and strategies without prior notice or stockholder approval.

Our board of directors has
the authority to modify or waive certain of our operating policies and strategies without prior notice and without stockholder approval (except as required by the 1940 Act). However, absent stockholder approval, under the 1940 Act, we may not change
the nature of our business so as to cease to be, or withdraw our election as, a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and value of our stock.
Nevertheless, the effects may adversely affect our business and impact our ability to make distributions.

We are subject to risks associated with
cybersecurity and cyber incidents.

Our business relies on secure information technology systems. These systems are subject to
potential attacks, including through adverse events that threaten the confidentiality, integrity or availability of our information resources (i.e., cyber incidents). These attacks could involve gaining unauthorized access to our information systems
for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption and result in disrupted operations, misstated or unreliable financial data, liability for stolen assets or information,
increased cybersecurity protection and insurance costs, litigation and damage to our business relationships, any of which could have a material adverse effect on our business, financial condition and results of operations. As our reliance
on technology has increased, so have the risks posed to our information systems, both internal and those provided by the Investment Adviser and third-party service providers.

RISKS RELATING TO THE ILLIQUID NATURE OF OUR PORTFOLIO ASSETS

We invest in illiquid assets, and our valuation procedures with respect to such assets may result in recording values that are materially different than
the values we ultimately receive upon disposition of such assets.

All of our investments are recorded using broker or dealer
quotes, if available, or at fair value as determined in good faith by our board of directors. We expect that most, if not all, of our investments (other than cash and cash equivalents) and the fair value of the Credit Facility will be classified as
Level 3 under the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures, or ASC 820. This means that the portfolio valuations will be based on unobservable inputs
and our own assumptions about how market participants would price the asset or liability. We expect that inputs into the determination of fair value of our portfolio investments and Credit Facility borrowings will require significant management
judgment or estimation. Even if observable market data are available, such information may be the result of consensus pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an actual
transaction. The non-binding nature of consensus pricing and/or quotes accompanied by such a disclaimer materially reduces the reliability of such information. As a result, there will be uncertainty as to the value of our portfolio investments.

Determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a
consistently applied valuation process for the types of investments we make. In determining fair value in good faith, we generally obtain financial and other information from portfolio companies, which may represent unaudited, projected or pro forma
financial information. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses; we are instead required by the 1940 Act to specifically fair value each individual investment on a quarterly basis. We record
unrealized appreciation if we believe that our investment has appreciated in value. Likewise, we record unrealized depreciation if we believe that our investment has depreciated in value. We adjust quarterly the valuation of our portfolio to reflect
our board of directors determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded on our Consolidated Statements of Operations as net change in unrealized appreciation or depreciation.

All of our investments are recorded at fair value as determined in good faith by our board of directors. Our board of directors uses the
services of nationally recognized independent valuation firms to aid it in determining the fair value of our investments. The factors that may be considered in fair value pricing of our investments include the nature and realizable value of any
collateral, the portfolio companys ability to make payments and its earnings and cash flows, the markets in which the portfolio company does business, comparison to publicly traded companies and other relevant factors. Because valuations may
fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the value received in an actual transaction. Additionally, valuations of private securities and private companies are
inherently uncertain. Our NAV could be adversely affected if our determinations regarding the fair value of our investments were materially lower than the values that we ultimately realize upon the disposal of such investments.

The lack of liquidity in our investments may adversely affect our business.

We may acquire our investments directly from the issuer in privately negotiated transactions. Substantially all of these securities are subject
to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. We typically exit our investments when the portfolio company has a liquidity event such as a sale, refinancing, or initial public offering of the
company, but we are not required to do so.

The illiquidity of our investments may make it difficult or impossible for us to sell such
investments if the need arises, particularly at times when the market for illiquid securities is substantially diminished. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than
the value at which we have previously recorded our investments, which could have a material adverse effect on our business, financial condition and results of operations. In addition, we may face other restrictions on our ability to liquidate an
investment in a portfolio company to the extent that we have material non-public information regarding such portfolio company.



22



---

##### Table of Contents

Investments purchased by us that are liquid at the time of purchase may subsequently become
illiquid due to events relating to the issuer of the investments, market events, economic conditions or investor perceptions. Domestic and foreign markets are complex and interrelated, so that events in one sector of the world markets or economy, or
in one geographical region, can reverberate and have materially negative consequences for other market, economic or regional sectors in a manner that may not be foreseen and which may materially harm our business.

A general disruption in the credit markets could materially damage our business.

We are susceptible to the risk of significant loss if we are forced to discount the value of our investments in order to provide liquidity to
meet our debt maturities. Funding Is borrowings under its Credit Facility are collateralized by the assets in our investment portfolio. A general disruption in the credit markets could result in diminished demand for our securities. In
addition, with respect to over-the-counter traded securities, the continued viability of any over-the-counter secondary market depends on the continued willingness of dealers and other participants to purchase the securities.

If the fair value of our assets declines substantially, we may fail to maintain the asset coverage ratio stipulated by the 1940 Act, which
could, in turn, cause us to lose our status as a BDC and materially impair our business operations. Our liquidity could be impaired further by an inability to access the capital markets or to draw down Funding Is Credit Facility. These
situations may arise due to circumstances that we may be unable to control, such as a general disruption in the credit markets, a severe decline in the value of the U.S. dollar, a sharp economic downturn or an operational problem that affects our
counterparties or us, and could materially damage our business.

We may invest in over-the-counter securities, which have and may continue to face
liquidity constraints, to provide us with liquidity.

The market for over-the-counter traded securities has and may continue to
experience limited liquidity and other weakness as the viability of any over-the-counter secondary market depends on the continued willingness of dealers and other participants to purchase the securities.

RISKS RELATED TO OUR INVESTMENTS

Our investments in
prospective portfolio companies may be risky, and you could lose all or part of your investment.

We intend to invest primarily in
Floating Rate Loans, which may consist of senior secured debt, mezzanine debt and selected equity investments issued by U.S. middle-market companies.



| | 1. | Floating Rate Loans: The Floating Rate Loans we invest in are usually rated below investment grade or may also be unrated. Investments in Floating Rate Loans rated below investment grade are considered
speculative because of the credit risk of their issuers. Such companies are more likely than investment grade issuers to default on their payments of interest and principal owed to us, and such defaults could reduce our NAV and income distributions.
An economic downturn would generally lead to a higher default rate by portfolio companies. A Floating Rate Loan may lose significant market value before a default occurs and we may experience losses due to the inherent illiquidity of the
investments. Moreover, any specific collateral used to secure a Floating Rate Loan may decline in value or become illiquid, which would adversely affect the Floating Rate Loans fair value. Floating Rate Loans are subject to a number of risks,
including liquidity risk and the risk of investing in below investment-grade, variable-rate securities.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Floating Rate Loans
are subject to the risk of non-payment of scheduled interest or principal. Such non-payment would result in a reduction of income to us, a reduction in the fair value of the investment and a potential decrease in our NAV. There can be no assurance
that the liquidation of any collateral securing a Floating Rate Loan would satisfy the borrowers obligation in the event of non-payment of scheduled interest or principal payments, or that the collateral could be readily liquidated. In the
event of bankruptcy or insolvency of a borrower, we could experience delays or limitations with respect to our ability to realize the benefits of the collateral securing a Floating Rate Loan. The collateral securing a Floating Rate Loan may lose all
or substantially all of its value in the event of the bankruptcy or insolvency of a borrower. Some loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws, could subordinate the rights in collateral of
such loans to presently existing or future indebtedness of the borrower or take other actions detrimental to the holders of loans including, in certain circumstances, invalidating such loans or causing interest previously paid to be refunded to the
borrower. Either such step could materially negatively affect our performance.

We may acquire Floating Rate Loans through assignments or
participations of interests in such loans. The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to such debt obligation.
However, the purchasers rights can be more restricted than those of the assigning institution, and we may not be able to unilaterally enforce all rights and remedies under an assigned debt obligation and with regard to any associated
collateral. A participation typically results in a contractual relationship only with the institution participating out the interest and not directly with the borrower. Sellers of participations typically include banks, broker-dealers, other
financial institutions and lending institutions. In purchasing participations, we generally will have no right to enforce compliance by the borrower with the terms of the loan agreement against the borrower, and we may not directly benefit from the
collateral supporting the debt obligation in which we have purchased the participation. As a result, we will be exposed to the credit risk of both the borrower and the institution selling the participation. Further, in purchasing participations in
lending syndicates, we will not be able to conduct the same level of due diligence on a borrower or the quality of the Floating Rate Loan with respect to which we are buying a participation as we would conduct if we were investing directly in the
Floating Rate Loan. This difference may result in us being exposed to greater credit or fraud risk with respect to such Floating Rate Loans than we expected when initially purchasing the participation.



| | 2. | Senior Secured Debt: When we extend senior secured debt, which we define to include first lien debt, we will generally take a security interest in the available assets of these portfolio companies,
including the equity interests of their subsidiaries, although this may not always be the case. We expect this security interest, if any, to help mitigate the risk that we will not be repaid. However, there is a risk that the collateral securing our
loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the
portfolio company to raise additional capital. Also, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration in a portfolio companys financial condition and prospects, including its
inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a senior secured debt investment is secured does not guarantee that we will receive principal and
interest payments according to the loans terms, or at all, or that we will be able to collect on the loan should we be forced to enforce our remedies.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Mezzanine Debt: Our mezzanine debt investments, which we define to include second lien secured and subordinated debt, will generally be subordinated to senior secured debt and will generally be unsecured.
Our second lien debt is subordinated debt that benefits from a collateral interest in the borrower. As such, other creditors may rank senior to us in the event of insolvency. This may result in an above average amount of risk and volatility or a
loss of principal. These investments may involve additional risks that could adversely affect our investment returns. To the extent interest payments associated with such debt are deferred, such debt may be subject to greater fluctuations in
valuations, and such debt could subject us and our stockholders to non-cash income. Since we may not receive cash interest or principal prior to the maturity of some of our mezzanine debt investments, such investments may be of greater risk than
cash paying loans.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



---

##### Table of Contents

| | 4. | Equity Investments: We have made and expect to continue to make select equity investments, all of which are subordinated to debt investments. In addition, when we invest in senior secured debt or mezzanine
debt, we may acquire warrants to purchase equity investments from time to time. Our goal is ultimately to dispose of these equity investments and realize gains upon our disposition of such interests. However, the equity investments we receive may
not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity investments, and any gains that we do realize on the disposition of any equity investments may not be sufficient to offset
any other losses we experience. In addition, many of the equity securities in which we invest may not pay dividends on a regular basis, if at all. Furthermore, we may hold equity investments in partnerships through a taxable subsidiary for federal
income tax purposes. Upon sale or exit of such investment, we may pay taxes at regular corporate tax rates, which will reduce the amount on gains or dividends available for distributions to our stockholders.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, investing in middle-market companies involves a number of significant risks, including:



| |  |  | companies may be highly leveraged, have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any
collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | they typically have shorter operating histories, more limited publicly available information, narrower product lines, more concentration of revenues from customers and smaller market shares than larger businesses, which
tend to render them more vulnerable to competitors actions and changing market conditions, as well as general economic downturns;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material
adverse impact on our portfolio company and, in turn, on us;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may
require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and our Investment Adviser may, in the ordinary course of business, be named
as defendants in litigation arising from our investments in the portfolio companies; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | they may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to refinance their outstanding indebtedness upon maturity.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the 1940 Act we may invest up to 30% of our assets in investments that are not qualifying assets for business development companies. If we do not
invest a sufficient portion of our assets in qualifying assets, we could be precluded from investing in assets that we deem to be attractive.

As a BDC, we may not acquire any asset other than qualifying assets, as defined under the 1940 Act, unless at the time the acquisition is made
such qualifying assets represent at least 70% of the value of our total assets. Qualifying assets include investments in U.S. operating companies whose securities are not listed on a national securities exchange and companies listed on a national
securities exchange subject to a maximum market capitalization of $250 million. Qualifying assets also include cash, cash equivalents, government securities and high quality debt securities maturing in one year or less from the time of investment.

We believe that most of our debt and equity investments do and will constitute qualifying assets. However, we may be precluded from
investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets at the time of a proposed investment, we
will be prohibited from making any additional investment that is not a qualifying asset and could be forced to forgo attractive investment opportunities. Similarly, these rules could prevent us from making follow-on investments in existing portfolio
companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to comply with the 1940 Act. If we need to dispose of such investments quickly, it would be difficult to
dispose of such investments on favorable terms. For example, we may have difficulty in finding a buyer and, even if we do find a buyer, we may have to sell the investments at a substantial loss.

We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we generally are not limited with respect to the proportion
of our assets that may be invested in securities of a single issuer.

We are classified as a non-diversified investment company
within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer, excluding limitations on investments in other investment
companies. To the extent that we assume large positions in the securities of a small number of issuers, our NAV may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the
markets assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond the Diversification Requirements, we do not have fixed guidelines for portfolio
diversification, and our investments could be concentrated in relatively few portfolio companies or industries.

Economic recessions or downturns
could impair our portfolio companies and harm our operating results.

Many of our portfolio companies are susceptible to economic or
industry centric slowdowns or recessions and may be unable to repay debt from us during these periods. Therefore, our non-performing assets are likely to increase, and the value of our portfolio is likely to decrease during these periods. Adverse
economic conditions also may decrease the value of collateral securing some of our debt investments and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a material decrease in
revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from
increasing investments and materially harm our operating results.

A portfolio companys failure to satisfy financial or operating
covenants imposed by us or other lenders could lead to defaults and potential termination of its debt and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio companys
ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company, and any restructuring could further
cause adverse effects on our business. Depending on the facts and circumstances of our investments and the extent of our involvement in the management of a portfolio company, upon the bankruptcy of a portfolio company, a bankruptcy court may
recharacterize our debt investments as equity investments and subordinate all or a portion of our claim to that of other creditors. This could occur regardless of how we may have structured our investment. In addition, we cannot assure you that a
bankruptcy court would not take actions contrary to our interests.

If we fail to make follow-on investments in our portfolio companies, this could
materially impair the value of our portfolio.

Following an initial investment in a portfolio company, we may make additional
investments in that portfolio company as follow-on investments, in order to:



| |  |  | increase or maintain in whole or in part our equity ownership percentage;
| | - |  | -------------------------------------------------------------------------



24



---

##### Table of Contents

| |  |  | exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | attempt to preserve or enhance the value of our investment.
| | - |  | -----------------------------------------------------------

We have the discretion to make any
follow-on investments, subject to the availability of capital resources and regulatory considerations. We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. Any failure to make follow-on
investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful transaction or business. Even if
we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, or because we are inhibited by
compliance with BDC requirements or the desire to maintain our RIC tax status.

Because we do not generally hold controlling equity interests in our
portfolio companies, we are not in a position to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.

Because we do not generally have controlling equity positions in our portfolio companies, we are subject to the risk that a portfolio company
may make business decisions with which we disagree, and the stockholders and management of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity for the debt and equity
investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company, and may therefore suffer a decrease in the market value of our
investments.

An investment strategy focused primarily on privately held companies, including controlling equity interests, presents certain
challenges, including the lack of available or comparable information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns.

We have invested and intend to continue to invest primarily in privately held companies. Generally, little public information exists about these
companies, and we rely on the ability of our Investment Advisers investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. If they are unable to uncover all material
information about these companies, we may not make a fully informed investment decision, and we may lose value on our investments. Also, privately held companies frequently have less diverse product lines and smaller market presence than larger
competitors. These factors could have a material adverse impact on our investment returns as compared to companies investing primarily in the securities of public companies.

Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies and our portfolio companies may be highly
leveraged.

We invest primarily in Floating Rate Loans issued by our portfolio companies. The portfolio companies usually will have,
or may be permitted to incur, other debt that ranks equally with, or senior to, our investments, and they may be highly leveraged. By their terms, such debt instruments may provide that the holders are entitled to receive payment of interest or
principal on or before the dates on which we are entitled to receive payments with respect to our debt investments. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt
instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such senior creditors, the portfolio
company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding
such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

Our incentive fee
may induce the Investment Adviser to make speculative investments.

The incentive fee payable by us to PennantPark Investment
Advisers may create an incentive for PennantPark Investment Advisers to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The incentive fee payable to our
Investment Adviser is calculated based on a percentage of our NAV. This may encourage our Investment Adviser to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of
default, which would disfavor the holders of our common stock. In addition, our Investment Adviser will receive the incentive fee based, in part, upon net capital gains realized on our investments. Unlike that portion of the incentive fee based on
income, there is no hurdle applicable to the portion of the incentive fee based on net capital gains. As a result, the Investment Adviser may have a tendency to invest more capital in investments that are likely to result in capital gains as
compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

The part of our incentive fee payable by us to PennantPark Investment Advisers that relates to net investment income is computed and paid on
income that has been accrued but that has not been received in cash. PennantPark Investment Advisers is not obligated to reimburse us for any such incentive fees even if we subsequently incur losses or never receive in cash the deferred income that
was previously accrued. As a result, there is a risk that we will pay incentive fees with respect to income that we never receive in cash.

Any
investments in distressed debt may not produce income and may require us to bear large expenses in order to protect and recover our investment.

Distressed debt investments may not produce income and may require us to bear certain additional expenses in order to protect and recover our
investment. Therefore, to the extent we invest in distressed debt, our ability to achieve current income for our stockholders may be diminished. We also will be subject to significant uncertainty as to when and in what manner and for what value the
distressed debt in which we invest will eventually be satisfied (e.g., through liquidation of the obligors assets, an exchange offer or plan of reorganization involving the distressed debt securities or a payment of some amount in satisfaction
of the obligation). In addition, even if an exchange offer is made or plan of reorganization is adopted with respect to distressed debt we hold, there can be no assurance that the securities or other assets received by us in connection with such
exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made. Moreover, any securities received by us upon completion of an exchange offer or plan of
reorganization may be restricted as to resale. If we participate in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of distressed debt, we may be restricted from disposing of such securities.

Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.

Our investment strategy contemplates potential investments in securities of companies located outside of the United States. Investments in
securities of companies located outside the United States would not be qualifying assets under Section 55(a) of the 1940 Act. Investing in companies located outside of the United States may expose us to additional risks not typically associated
with investing in U.S. companies. These risks include changes in exchange control regulations, political, economic and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is
generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and
auditing standards and greater price volatility.



25



---

##### Table of Contents

Although most of our investments will be U.S. dollar-denominated, any investments denominated in a
foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of interest rates,
differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, economic and political developments. We may employ hedging techniques such as using our Credit Facilitys
multicurrency capability to minimize these risks, but we can offer no assurance that we will, in fact, hedge currency risk or, that if we do, such strategies will be effective.

We may make investments that cause our stockholders to bear investment advisory fees and other expenses on such investments in addition to our management
fees and expenses.

We may invest, to the extent permitted by law, in the securities and instruments of other investment companies
and companies that would be investment companies but are excluded from the definition of an investment company provided in Section 3(c) of the 1940 Act. To the extent we so invest, we will bear our ratable share of any such investment
companys expenses, including management and performance fees. We will also remain obligated to pay investment advisory fees, consisting of a base management fee and an incentive fee, to PennantPark Investment Advisers with respect to
investments in the securities and instruments of other investment companies under our Investment Management Agreement. With respect to any such investments, each of our stockholders will bear his or her share of the investment advisory fees of
PennantPark Investment Advisers as well as indirectly bearing the investment advisory fees and other expenses of any investment companies in which we invest.

We may be obligated to pay our Investment Adviser incentive compensation even if we incur a loss.

Our Investment Adviser is entitled to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our
investment income for that quarter (before deducting incentive compensation, net operating losses and certain other items) above a threshold return for that quarter. Our Pre-Incentive Fee Net Investment Income for incentive compensation purposes
excludes realized and unrealized capital losses that we may incur in the fiscal quarter, even if such capital losses result in a net loss on our Consolidated Statements of Operations for that quarter. Thus, we may be required to pay the Investment
Adviser incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio, NAV or we incur a net loss for that quarter.

We may expose ourselves to risks if we engage in hedging transactions.

If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may borrow under a multicurrency
credit facility in currencies selected to minimize our foreign currency exposure or, to the extent permitted by the 1940 Act and applicable commodities laws, use instruments such as forward contracts, currency options and interest rate swaps, caps,
collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our interest rate or currency
positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging designed to gain from those changes in interest rates or foreign currency
exposures, for instance, may also limit the opportunity for gain if the changes in the underlying positions should move against such hedges. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so
generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.

While we may enter into such
transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in worse overall investment performance than if we had not engaged in any such hedging
transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to
establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be
possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency
fluctuations. Our ability to engage in hedging transactions may also be adversely affected by the rules of the Commodity Futures Trading Commission.

The effect of global climate change may impact the operations of our portfolio companies.

There may be evidence of global climate change. Climate change creates physical and financial risk and some of our portfolio companies may be
adversely affected by climate change. For example, the needs of customers of energy companies vary with weather conditions, primarily temperature and humidity. To the extent weather conditions are affected by climate change, energy use could
increase or decrease depending on the duration and magnitude of any changes. Increases in the cost of energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or services is material to their
business. A decrease in energy use due to weather changes may affect some of our portfolio companies financial condition, through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can
contribute to increased system stresses, including service interruptions.

RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK

We may obtain the approval of our stockholders to issue shares of our common stock at prices below the then current NAV per share of our common stock. If
we receive such approval from stockholders in the future, we may issue shares of our common stock at a price below the then current NAV per share of common stock. Any such issuance could materially dilute your interest in our common stock and reduce
our NAV per share.

We may seek to obtain from our stockholders and they may approve a proposal that authorizes us to issue shares
of our common stock at prices below the then current NAV per share of our common stock in one or more offerings for a 12-month period. Such approval would allow us to access the capital markets in a way that we were previously unable to do as a
result of restrictions that, absent stockholder approval, apply to BDCs under the 1940 Act.

Any sale or other issuance of shares of our
common stock at a price below NAV per share will result in an immediate dilution to your interest in our common stock and a reduction of our NAV per share. This dilution would occur as a result of a proportionately greater decrease in a
stockholders interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. Because the number of future shares of common stock that may be issued below our NAV per share and the
price and timing of such issuances are not currently known, we cannot predict the actual dilutive effect of any such issuance. We also cannot determine the resulting reduction in our NAV per share of any such issuance at this time. We caution you
that such effects may be material, and we undertake to describe all the material risks and dilutive effects of any offerings we make at a price below our then current NAV in the future in a prospectus supplement issued in connection with any such
offering.

The determination of NAV in connection with an offering of shares of common stock will involve the determination by our board of
directors or a committee thereof that we are not selling shares of our common stock at a price below the then current NAV of our common stock at the time at which the sale is made or otherwise in violation of the 1940 Act unless we have previously
received the consent of the majority of our common stockholders to do so and the board of directors decides such an offering is in the best interests of our common stockholders. Whenever we do not have current stockholder approval to issue shares of
our common stock at a price per share below our then current NAV per share, the offering price per share (after any distributing commission or discount) will equal or exceed our then current NAV per share, based on the value of our portfolio
securities and other assets determined in good faith by our board of directors as of a time within 48 hours (excluding Sundays and holidays) of the sale.



26



---

##### Table of Contents

There is a risk that our stockholders may not receive distributions or that our distributions may not grow
over time.

We intend to make distributions on a monthly basis to our stockholders out of assets legally available for distribution.
We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage ratio requirements applicable to
us as a BDC, we may be limited in our ability to make distributions. Further, if more stockholders opt to receive cash dividends and other distributions rather than participate in our dividend reinvestment plan, we may be forced to liquidate some of
our investments and raise cash in order to make distribution payments, which could materially harm our business. Finally, to the extent we make distributions to stockholders which include a return of capital, that portion of the distribution
essentially constitutes a return of the stockholders investment. Although such return of capital may not be taxable, such distributions may increase an investors tax liability for capital gains upon the future sale of our common stock.

Investing in our shares may involve an above average degree of risk.

The investments we make in accordance with our investment objectives may result in a higher amount of risk and volatility than alternative
investment options or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive and therefore, an investment in our shares may not be suitable for someone with lower risk tolerance.

Sales of substantial amounts of our securities may have an adverse effect on the market price of our securities.

Sales of substantial amounts of our securities, or the availability of such securities for sale, could adversely affect the prevailing market
prices for our securities. If this occurs and continues it could impair our ability to raise additional capital through the sale of securities should we desire to do so.

We may allocate the net proceeds from any offering of our securities in ways with which you may not agree.

We have significant flexibility in investing the net proceeds of any offering of our securities and may use the net proceeds from an offering in
ways with which you may not agree or for purposes other than those contemplated at the time of the offering.

Our shares may trade at discounts from
NAV or at premiums that are unsustainable over the long term.

Shares of BDCs may trade at a market price that is less than the NAV
that is attributable to those shares. Our shares have traded above and below our NAV. Our shares closed on the NASDAQ Global Select Market at $13.23 and $11.94 on September 30, 2016 and 2015, respectively. Our NAV per share was $14.06 and
$13.95 for the same periods. The possibility that our shares of common stock will trade at a discount from NAV or at a premium that is unsustainable over the long term is separate and distinct from the risk that our NAV will decrease. It is not
possible to predict whether our shares will trade at, above or below NAV in the future.

The market price of our common stock may fluctuate
significantly.

The market price and liquidity of the market for shares of our common stock may be significantly affected by
numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:



| |  |  | significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | any loss of our BDC or RIC status;
| | - |  | ----------------------------------



| |  |  | changes in earnings or variations in operating results;
| | - |  | -------------------------------------------------------



| |  |  | changes in prevailing interest rates;
| | - |  | -------------------------------------



| |  |  | changes in the value of our portfolio of investments;
| | - |  | -----------------------------------------------------



| |  |  | any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the inability of our Investment Adviser to employ additional experienced investment professionals or the departure of any of the Investment Advisers key personnel;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | operating performance of companies comparable to us;
| | - |  | ----------------------------------------------------



| |  |  | general national and international economic trends and other external factors;
| | - |  | ------------------------------------------------------------------------------



| |  |  | general price and volume fluctuations in the stock markets, including as a result of short sales;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | conversion features of subscription rights, warrants or convertible debt; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | loss of a major funding source.
| | - |  | -------------------------------

Since our initial listing on the NASDAQ Global Select Market,
our shares of common stock have traded at a wide range of prices. We can offer no assurance that our shares of common stock will not display similar volatility in future periods.

We may be unable to invest the net proceeds raised from offerings on acceptable terms, which would harm our financial condition and operating results.

Until we identify new investment opportunities, we intend to either invest the net proceeds of future offerings in cash
equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less or use the net proceeds from such offerings to reduce then-outstanding obligations under our Credit Facility or any future Credit
Facility. We cannot assure you that we will be able to find enough appropriate investments that meet our investment selection criteria or that any investment we complete using the proceeds from an offering will produce a sufficient return.

You may have current tax liabilities on distributions you reinvest in our common stock.

Under the dividend reinvestment plan, if you own shares of our common stock registered in your own name, you will have all cash distributions
automatically reinvested in additional shares of our common stock unless you opt out of the dividend reinvestment plan by delivering a written notice to the plan administrator prior to the record date of the next dividend or distribution. If you
have not opted out of the dividend reinvestment plan, you will be deemed to have received, and for federal income tax purposes will be taxed on, the amount reinvested in our common stock to the extent the amount reinvested was not a
tax-free return of capital. As a result, you may have to use funds from other sources to pay your income tax liabilities on the value of the common stock received. See Managements Discussion and Analysis of Financial Condition and
Results of OperationsLiquidity and Capital ResourcesDistributions for more information.



27



---

##### Table of Contents

There is a risk that our common stockholders may receive our stock as distributions in which case they may
be required to pay taxes in excess of the cash they receive.

We may distribute our common stock as a dividend of our taxable income
and a stockholder could receive a portion of the dividends declared and distributed by us in shares of our common stock with the remaining amount in cash. A stockholder will be considered to have recognized dividend income generally equal to the
fair market value of the stock paid by us plus cash received with respect to such dividend. The total dividend declared would be taxable income to a stockholder even though he or she may only receive a relatively small portion of the dividend in
cash to pay any taxes due on the dividend. We have not elected to distribute stock as a dividend but reserve the right to do so.

We incur significant
costs as a result of being a publicly traded company.

As a publicly traded company, we incur legal, accounting and other expenses,
including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including requirements under the
Sarbanes-Oxley Act, and other rules implemented by the SEC and the listing standards of the NASDAQ Stock Market LLC.

Provisions of the Maryland
General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.

The Maryland General Corporation Law, our charter and our bylaws contain provisions that may discourage, delay or make more difficult a change
in control of us or the removal of our directors. We are subject to the Maryland Business Combination Act, the application of which is subject to any applicable requirements of the 1940 Act. Our board of directors has adopted a resolution exempting
from the Business Combination Act any business combination between us and any other person, subject to prior approval of such business combination by our board, including approval by a majority of our disinterested directors. If the resolution
exempting business combinations is repealed or our board does not approve a business combination, the Business Combination Act may discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an
offer.

In addition, our bylaws exempt from the Maryland Control Share Acquisition Act acquisitions of our common stock by any person. If we
amend our bylaws to repeal the exemption from such act, it may make it more difficult for a third party to obtain control of us and increase the difficulty of consummating such an offer. Our bylaws require us to consult with the SEC staff before we
repeal such exemption. Also, our charter provides for classifying our board of directors in three classes serving staggered three-year terms, and provisions of our charter authorize our board of directors to classify or reclassify shares of our
stock in one or more classes or series, to cause the issuance of additional shares of our stock, and to amend our charter, without stockholder approval, to increase or decrease the number of shares of stock that we have authority to issue.

These anti-takeover provisions may inhibit a change of control in circumstances that could give our stockholders the opportunity to realize a
premium over the market price for our common stock.



28



---

##### Table of Contents

|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

None.



|Item 2. | Properties
|------- | ----------

As of September 30, 2016, we did not own any real estate or other
physical properties materially important to our operation. We believe that the office facilities of the Investment Adviser and Administrator are suitable and adequate for our business as it is contemplated to be conducted.



|Item 3. | Legal Proceedings
|------- | -----------------

None of us, our Investment Adviser or our Administrator is currently
subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us, or against our Investment Adviser or Administrator. From time to time, we, our Investment Adviser or Administrator, may be a
party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. MCG was a party to certain legal proceedings incidental to the
normal course of its business, including the enforcement of its rights under contracts with its portfolio companies. We inherited this litigation upon the closing of our acquisition of MCG. While the outcome of these and any future legal proceedings
cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations, although we cannot assure you that amounts received in settlement may not be requested to
be returned or that we may not be found liable in any such litigation.



|Item 4. | Mine Safety Disclosures
|------- | -----------------------

Not applicable.



29



---

##### Table of Contents

PART II



|Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ------------------------------------------------------------------------------------------------------------

PRICE RANGE OF COMMON STOCK

Our common stock is traded on the NASDAQ Global Select Market under the symbol PFLT. The following table lists the high and low
closing sale prices for our common stock, the closing sale prices as a premium or (discount) to our NAV per share and distributions declared per share since October 1, 2014.



|                                     |  |        |       |  |                     |   |       |                                  |  |   |                                 |  |  |               |     |    |  |  |     |    |  |   |        | 
|------------------------------------ |  | ------ | ----- |  | ------------------- | - | ----- | -------------------------------- |  | - | ------------------------------- |  |  | ------------- | --- | -- |  |  | --- | -- |  | - | ------ | 
|Period                               |  | NAV(1) |       |  | Closing Sale Prices |   |       | Premium /
(Discount)of High Sale |  |   | Premium /
(Discount)of Low Sale |  |  | Distributions |    
|                                     |  | High   |       |  | Low                 |   |       | Price to NAV(2)                  |  |   | Price to NAV(2)                 |  |  | Declared      |    
|Fiscal Year Ended September 30, 2016 |  |        |       |  |                     |   |       |                                  |  |   |                                 |  |  |               |     |    |  |  |     |    |  |   |        | 
|Fourth quarter                       |  | $      | 14.06 |  |                     | $ | 13.26 |                                  |  | $ | 12.54                           |  |  |               | (6  | )% |  |  | (11 | )% |  | $ | 0.2850 | 
|Third quarter                        |  |        | 13.75 |  |                     |   | 12.51 |                                  |  |   | 11.58                           |  |  |               | (9  | )  |  |  | (16 | )  |  |   | 0.2850 | 
|Second quarter                       |  |        | 13.54 |  |                     |   | 11.70 |                                  |  |   | 10.09                           |  |  |               | (14 | )  |  |  | (25 | )  |  |   | 0.2850 | 
|First quarter                        |  |        | 13.73 |  |                     |   | 12.42 |                                  |  |   | 10.79                           |  |  |               | (10 | )  |  |  | (21 | )  |  |   | 0.2850 | 
|Fiscal Year Ended September 30, 2015 |  |        |       |  |                     |   |       |                                  |  |   |                                 |  |  |               |     |    |  |  |     |    |  |   |        | 
|Fourth quarter                       |  |        | 13.95 |  |                     |   | 14.30 |                                  |  |   | 11.35                           |  |  |               | 3   |    |  |  | (19 | )  |  |   | 0.2850 | 
|Third quarter                        |  |        | 14.33 |  |                     |   | 14.48 |                                  |  |   | 13.88                           |  |  |               | 1   |    |  |  | (3  | )  |  |   | 0.2850 | 
|Second quarter                       |  |        | 14.30 |  |                     |   | 14.16 |                                  |  |   | 13.25                           |  |  |               | (1  | )  |  |  | (7  | )  |  |   | 0.2750 | 
|First quarter                        |  |        | 14.16 |  |                     |   | 14.23 |                                  |  |   | 12.98                           |  |  |               |    |    |  |  | (8  | )  |  |   | 0.2700 | 



|(1) | NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices.
The NAVs shown are based on outstanding shares at the end of each period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Calculated as the respective high or low closing sale prices less NAV per share, divided by the quarter-end NAV per share.
|--- | --------------------------------------------------------------------------------------------------------------------------

Shares of BDCs may trade at a market price both above and below the NAV that is attributable to those shares. Our shares have traded above and
below our NAV. Our shares closed on the NASDAQ Global Select Market at $13.23 and $11.94 on September 30, 2016 and 2015, respectively. Our NAV per share was $14.06 and $13.95 for the same periods. The possibility that our shares of common stock
will trade at a discount from NAV or at a premium that is unsustainable over the long term is separate and distinct from the risk that our NAV will decrease. It is not possible to predict whether our shares will trade at, above or below our NAV in
the future. As of November 22, 2016, we had 40 stockholders of record.

Sale of Unregistered Securities

We did not engage in any sales of unregistered securities during the fiscal year ended September 30, 2016.



30



---

##### Table of Contents

DISTRIBUTIONS

We intend to continue making monthly distributions to our stockholders. The timing and amount of our monthly distributions, if any, is
determined by our board of directors. Any distributions to our stockholders are declared out of assets legally available for distribution. We monitor available net investment income to determine if a tax return of capital may occur for the fiscal
year. To the extent our taxable earnings fall below the total amount of our distributions for any given fiscal year, a portion of those distributions may be deemed to be a tax return of capital to our common stockholders. The following table
reflects the cash distributions that we have declared on our common stock in the last two fiscal years.



|                                     |  |               |                   |  |                       |   |        | 
|------------------------------------ |  | ------------- | ----------------- |  | --------------------- | - | ------ | 
|Record Dates                         |  | Payment Dates |                   |  | DistributionsDeclared |  
|Fiscal Year Ended September 30, 2016 |  |               |                   |  |                       |   |        | 
|September 21, 2016                   |  |               | October 3, 2016   |  |                       | $ | 0.0950 | 
|August 19, 2016                      |  |               | September 1, 2016 |  |                       |   | 0.0950 | 
|July 20, 2016                        |  |               | August 1, 2016    |  |                       |   | 0.0950 | 
|June 20, 2016                        |  |               | July 1, 2016      |  |                       |   | 0.0950 | 
|May 20, 2016                         |  |               | June 1, 2016      |  |                       |   | 0.0950 | 
|April 20, 2016                       |  |               | May 2, 2016       |  |                       |   | 0.0950 | 
|March 18, 2016                       |  |               | April 1, 2016     |  |                       |   | 0.0950 | 
|February 18, 2016                    |  |               | March 1, 2016     |  |                       |   | 0.0950 | 
|January 20, 2016                     |  |               | February 1, 2016  |  |                       |   | 0.0950 | 
|December 24, 2015                    |  |               | January 4, 2016   |  |                       |   | 0.0950 | 
|November 19, 2015                    |  |               | December 1, 2015  |  |                       |   | 0.0950 | 
|October 21, 2015                     |  |               | November 2, 2015  |  |                       |   | 0.0950 | 
|                                     |  |               |                   |  |                       |   |        | 
|Total                                |  |               |                   |  |                       | $ | 1.1400 | 
|                                     |  |               |                   |  |                       |   |        | 
|Fiscal Year Ended September 30, 2015 |  |               |                   |  |                       |   |        | 
|September 21, 2015                   |  |               | October 1, 2015   |  |                       | $ | 0.0950 | 
|August 24, 2015                      |  |               | September 1, 2015 |  |                       |   | 0.0950 | 
|July 22, 2015                        |  |               | August 3, 2015    |  |                       |   | 0.0950 | 
|June 15, 2015                        |  |               | July 1, 2015      |  |                       |   | 0.0950 | 
|May 20, 2015                         |  |               | June 1, 2015      |  |                       |   | 0.0950 | 
|April 20, 2015                       |  |               | May 1, 2015       |  |                       |   | 0.0950 | 
|March 20, 2015                       |  |               | April 1, 2015     |  |                       |   | 0.0950 | 
|February 18, 2015                    |  |               | March 2, 2015     |  |                       |   | 0.0900 | 
|January 21, 2015                     |  |               | February 2, 2015  |  |                       |   | 0.0900 | 
|December 19, 2014                    |  |               | January 2, 2015   |  |                       |   | 0.0900 | 
|November 19, 2014                    |  |               | December 1, 2014  |  |                       |   | 0.0900 | 
|October 22, 2014                     |  |               | November 3, 2014  |  |                       |   | 0.0900 | 
|                                     |  |               |                   |  |                       |   |        | 
|Total                                |  |               |                   |  |                       | $ | 1.1150 | 
|                                     |  |               |                   |  |                       |   |        | 

In January 2017, a Form 1099-DIV will be sent to stockholders subject to information reporting that will state
the amount and composition of distributions and provide information with respect to appropriate tax treatment of our distributions.

The tax
characteristics of distributions declared, in accordance with Section 19(a) of the 1940 Act, during the fiscal years ended September 30, 2016 and 2015 from ordinary income (including short-term gains) totaled $30.5 million and $17.2
million, or $1.14 and $1.06 per share, respectively, based on the weighted average shares outstanding for the respective periods. Additionally, for the fiscal year ended September 30, 2015, we had long-term capital gain distributions of $1.7
million, or $0.10 per share, based on the weighted average shares outstanding.

We maintain an opt out dividend reinvestment
plan for our common stockholders. As a result, if we declare a dividend or other distribution, then stockholders cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically opt
out of the dividend reinvestment plan so as to receive cash distributions.

We may not be able to achieve operating results that will
allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage ratio for borrowings when applicable
to us as a BDC under the 1940 Act and due to provisions in future credit facilities. If we do not distribute a certain minimum percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our tax status. We
cannot assure stockholders that they will receive any distributions or distributions at a particular level.



31



---

##### Table of Contents

Stock Performance Graph

This graph compares the return on our common stock with that of the Standard & Poors 500 Stock Index and the Russell 2000
Financial Services Index, for the last five fiscal years. The graph assumes that, on September 30, 2011, a person invested $100 in each of our common stock, the S&P 500 Index, and the Russell 2000 Financial Services Index. The graph
measures total stockholder return, which takes into account both changes in stock price and distributions. It assumes that distributions paid are invested in like securities.



LOGO

The graph and other information furnished under this Part II Item 5 of this Report shall not be deemed
to be soliciting material or to be filed with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. The stock price performance included in the above graph is not
necessarily indicative of future stock price performance.



32



---

##### Table of Contents

|Item 6. | Selected Financial Data
|------- | -----------------------

We have derived the data below from our audited and unaudited
financial data. The Consolidated Statement of Operations data, per share data and Consolidated Statement of Assets and Liabilities data presented are derived from our audited Consolidated Financial Statements. These selected financial data should be
read in conjunction with our Consolidated Financial Statements and related notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations.



|                                                         |  |                                   |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------------------------------- |  | --------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                         |  | For the years ended September 30, |        
|                                                         |  | 2016                              |         |   | 2015 |   |         | 2014 |  |   | 2013    |   |  | 2012 |        
|(Dollar amounts in thousands, except per share data)     |  |                                   |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Consolidated Statements of Operations data:              |  |                                   |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total investment income                                  |  | $                                 | 46,301  |   |      | $ | 30,355  |      |  | $ | 30,357  |   |  | $    | 18,867  |   |  | $ | 12,099  |  
|Total expenses                                           |  |                                   | 18,965  |   |      |   | 12,695  |      |  |   | 13,721  |   |  |      | 8,344   |   |  |   | 5,789   |  
|Net investment income                                    |  |                                   | 27,336  |   |      |   | 17,660  |      |  |   | 16,636  |   |  |      | 10,523  |   |  |   | 6,310   |  
|Net realized and unrealized gain (loss)                  |  |                                   | 6,153   |   |      |   | (5,156  | )    |  |   | 3,878   |   |  |      | 1,461   |   |  |   | 5,651   |  
|Net increase in net assets resulting from operations     |  |                                   | 33,489  |   |      |   | 12,504  |      |  |   | 20,514  |   |  |      | 11,985  |   |  |   | 11,961  |  
|Per share data:                                          |  |                                   |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net asset value                                          |  |                                   | 14.06   |   |      |   | 13.95   |      |  |   | 14.40   |   |  |      | 14.10   |   |  |   | 13.98   |  
|Net investment income (1)                                |  |                                   | 1.02    |   |      |   | 1.08    |      |  |   | 1.12    |   |  |      | 1.10    |   |  |   | 0.92    |  
|Net realized and unrealized gain (loss)
(1)              |  |                                   | 0.23    |   |      |   | (0.31   | )    |  |   | 0.26    |   |  |      | 0.15    |   |  |   | 0.83    |  
|Net increase in net assets resulting from operations
(1) |  |                                   | 1.25    |   |      |   | 0.77    |      |  |   | 1.38    |   |  |      | 1.25    |   |  |   | 1.75    |  
|Distributions declared (1), (2)                          |  |                                   | 1.14    |   |      |   | 1.16    |      |  |   | 1.08    |   |  |      | 1.05    |   |  |   | 0.91    |  
|Consolidated Statements of Assets and Liabilities data:  |  |                                   |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                             |  |                                   | 631,420 |   |      |   | 416,120 |      |  |   | 372,874 |   |  |      | 328,802 |   |  |   | 178,367 |  
|Total investment portfolio                               |  |                                   | 598,888 |   |      |   | 391,312 |      |  |   | 348,428 |   |  |      | 317,804 |   |  |   | 171,834 |  
|Credit Facility payable (3)                              |  |                                   | 232,389 |   |      |   | 29,600  |      |  |   | 146,949 |   |  |      | 99,600  |   |  |   | 75,123  |  
|Total net asset value                                    |  |                                   | 375,907 |   |      |   | 372,890 |      |  |   | 214,528 |   |  |      | 210,066 |   |  |   | 95,744  |  
|Other data:                                              |  |                                   |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total return (4)                                         |  |                                   | 21.77   | % |      |   | (6.01   | )%   |  |   | 8.05    | % |  |      | 17.17   | % |  |   | 29.43   | %
|Number of portfolio companies (5)                        |  |                                   | 98      |   |      |   | 76      |      |  |   | 72      |   |  |      | 83      |   |  |   | 61      |  
|Yield on debt portfolio (5)                              |  |                                   | 7.8     | % |      |   | 7.9     | %    |  |   | 8.2     | % |  |      | 8.1     | % |  |   | 8.6     | %



|(1) | Based on the weighted average shares outstanding for the respective periods.
|--- | ----------------------------------------------------------------------------

|(2) | The tax status of our distributions is calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP and is reported on Form 1099-DIV each calendar year.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | At fair value.
|--- | --------------

|(4) | Based on the change in market price per share during the periods and takes into account distributions, if any, reinvested in accordance with our dividend reinvestment plan.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Unaudited, at year end.
|--- | -----------------------



33



---

##### Table of Contents

|Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

FORWARD-LOOKING STATEMENTS

This Report,
including Managements Discussion and Analysis of Financial Condition and Results of Operations, contains statements that constitute forward-looking statements, which relate to us and our consolidated subsidiaries regarding future events or our
future performance or future financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our Company, our industry, our beliefs and our assumptions.
The forward-looking statements contained in this Report involve risks and uncertainties, including statements as to:



| |  |  | our future operating results;
| | - |  | -----------------------------



| |  |  | our business prospects and the prospects of our prospective portfolio companies;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the dependence of our future success on the general economy and its impact on the industries in which we invest;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the impact of a protracted decline in the liquidity of credit markets on our business;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the impact of investments that we expect to make;
| | - |  | -------------------------------------------------



| |  |  | the impact of fluctuations in interest rates on our business and our portfolio companies;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | our contractual arrangements and relationships with third parties;
| | - |  | ------------------------------------------------------------------



| |  |  | the valuation of our investments in portfolio companies, particularly those having no liquid trading market;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the ability of our prospective portfolio companies to achieve their objectives;
| | - |  | -------------------------------------------------------------------------------



| |  |  | our expected financings and investments;
| | - |  | ----------------------------------------



| |  |  | the adequacy of our cash resources and working capital;
| | - |  | -------------------------------------------------------



| |  |  | the timing of cash flows, if any, from the operations of our prospective portfolio companies;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | the impact of price and volume fluctuations in the stock markets;
| | - |  | -----------------------------------------------------------------



| |  |  | the ability of the Investment Adviser to locate suitable investments for us and to monitor and administer our investments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the impact of future legislation and regulation on our business and our portfolio companies; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the impact of European sovereign debt, Brexit and other world economic and political issues.
| | - |  | --------------------------------------------------------------------------------------------

We
use words such as anticipates, believes, expects, intends, seeks, plans, estimates and similar expressions to identify forward-looking statements. You should not
place undue influence on the forward-looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in Risk Factors and elsewhere in this
Report.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those
assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and
levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Report should not be regarded as a representation by us that our plans
and objectives will be achieved.

We have based the forward-looking statements included in this Report on information available to us on the
date of this Report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this Report, whether as a result of new information, future
events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including reports on Form 10-Q/K and current reports on Form 8-K.

You should understand that under Section 27A(b)(2)(B) of the Securities Act and Section 21E(b)(2)(B) of the Exchange Act, the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995 do not apply to forward-looking statements made in periodic reports we file under the Exchange Act.

The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial
Statements and the related notes thereto contained elsewhere in this Report.

Overview

PennantPark Floating Rate Capital Ltd. is a BDC whose objectives are to generate current income and capital appreciation by investing primarily
in Floating Rate Loans and other investments made to U.S. middle-market companies.

We believe that Floating Rate Loans to U.S.
middle-market companies offer attractive risk-reward to investors due to a limited amount of capital available for such companies and the potential for rising interest rates. We use the term middle-market to refer to companies with
annual revenues between $50 million and $1 billion. Our investments are typically rated below investment grade. Securities rated below investment grade are often referred to as leveraged loans or high yield securities or
junk bonds and are often higher risk compared to debt instruments that are rated above investment grade and have speculative characteristics. However, when compared to junk bonds and other non-investment grade debt, senior secured
Floating Rate Loans typically have more robust capital-preserving qualities, such as historically lower default rates than junk bonds, represent the senior source of capital in a borrowers capital structure and often have certain of the
borrowers assets pledged as collateral. Our debt investments may generally range in maturity from three to ten years and are made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities which operate
in various industries and geographical regions.

Under normal market conditions, we generally expect that at least 80% of the value of our
Managed Assets will be invested in Floating Rate Loans and other investments bearing a variable-rate of interest. We generally expect that senior secured debt, or first lien loans, will represent at least 65% of our overall portfolio. We also
generally expect to invest up to 35% of our overall portfolio opportunistically in other types of investments, including second-lien, high yield, mezzanine and



34



---

##### Table of Contents

distressed debt securities and, to a lesser extent, equity investments. We seek to create a diversified portfolio by generally targeting an investment size between $3 million and $15 million, on
average, although we expect that this investment size will vary proportionately with the size of our capital base.

Our investment activity
depends on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the
types of investments we make. We have used, and expect to continue to use our Credit Facility, proceeds from the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives.

Organization and Structure of PennantPark Floating Rate Capital Ltd.

PennantPark Floating Rate Capital Ltd., a Maryland corporation organized in October 2010, is a closed-end, externally managed, non-diversified
investment company that has elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we elected to be treated, and intend to qualify annually, as a RIC under the Code.

Our investment activities are managed by the Investment Adviser. Under our Investment Management Agreement, we have agreed to pay our Investment
Adviser an annual base management fee based on our average adjusted gross total assets as well as an incentive fee based on our investment performance. We have also entered into an Administration Agreement with the Administrator. Under our
Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under our Administration Agreement, including rent and our
allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer and their respective staffs. Our board of directors, a majority of whom are independent of us, provides overall supervision
of our activities, and the Investment Adviser supervises our day-to-day activities.

In August 2015, we completed the acquisition of
MCG pursuant to the Merger Agreement. As a result of the transactions contemplated by the Merger Agreement, MCG was merged with and into PFLT Panama, LLC with MCG as the surviving corporation, following which MCG was merged with and into PFLT
Funding II, LLC with PFLT Funding II, LLC as the surviving company.

Revenues

We generate revenue in the form of interest income on the debt securities we hold and capital gains and dividends, if any, on investment
securities that we may acquire in portfolio companies. Our debt investments, whether in the form of senior secured debt or mezzanine debt, typically have a term of three to ten years and bear interest at a fixed or floating rate. Interest on debt
securities is generally payable quarterly or semiannually. In some cases, our investments provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally becomes due
at the maturity date. In addition, we may generate revenue in the form of amendment, commitment, origination, structuring or diligence fees, fees for providing managerial assistance and possibly consulting fees. Loan origination fees, OID and market
discount or premium are capitalized, and we accrete or amortize such amounts as income or expense, as applicable, using the effective interest method as interest income. We record prepayment penalties on loans and debt securities as income. Dividend
income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts. Litigation settlements are accounted for in accordance with the gain contingency provisions of ASC 450-30.

Expenses

Our primary operating
expenses include the payment of a management fee and the payment of an incentive fee to our Investment Adviser, if any, our allocable portion of overhead under our Administration Agreement and other operating costs as detailed below. Our
management fee compensates our Investment Adviser for its work in identifying, evaluating, negotiating, consummating and monitoring our investments. Additionally, we pay interest expense on the outstanding debt and unused commitment fees on undrawn
amounts, under our Credit Facility. We bear all other direct or indirect costs and expenses of our operations and transactions, including:



| |  |  | the cost of calculating our net asset value, including the cost of any third-party valuation services;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | the cost of effecting sales and repurchases of shares of our common stock and other securities;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence and reviews of prospective investments or complementary businesses;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expenses incurred by the Investment Adviser in performing due diligence and reviews of investments;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | transfer agent and custodial fees;
| | - |  | ----------------------------------



| |  |  | fees and expenses associated with marketing efforts;
| | - |  | ----------------------------------------------------



| |  |  | federal and state registration fees and any stock exchange listing fees;
| | - |  | ------------------------------------------------------------------------



| |  |  | fees and expenses associated with independent audits and outside legal costs;
| | - |  | -----------------------------------------------------------------------------



| |  |  | federal, state, local and foreign taxes;
| | - |  | ----------------------------------------



| |  |  | independent directors fees and expenses;
| | - |  | -----------------------------------------



| |  |  | brokerage commissions;
| | - |  | ----------------------



| |  |  | fidelity bond, directors and officers, errors and omissions liability insurance and other insurance premiums;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | direct costs such as printing, mailing, long distance telephone and staff;
| | - |  | --------------------------------------------------------------------------



| |  |  | costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | all other expenses incurred by either the Administrator or us in connection with administering our business, including payments under our Administration Agreement that will be based upon our allocable portion of
overhead, and other expenses incurred by the Administrator in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer,
Chief Financial Officer and their respective staffs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



---

##### Table of Contents

Generally, during periods of asset growth, we expect our general and administrative expenses to be
relatively stable or to decline as a percentage of total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities would be additive to the expenses described above.

PORTFOLIO AND INVESTMENT ACTIVITY

As
of September 30, 2016, our portfolio totaled $598.9 million and consisted of $548.4 million of senior secured debt, $36.6 million of second lien secured debt and $13.9 million of subordinated debt, preferred and common equity. Our debt
portfolio consisted of 99% variable-rate investments (including 94% with a LIBOR or prime floor) and 1% fixed-rate investments. As of September 30, 2016, we had one company on non-accrual, representing 0.2% and 0.1% of our overall portfolio on
a cost and fair value basis, respectively. Overall, the portfolio had net unrealized appreciation of $1.0 million. Our overall portfolio consisted of 98 companies with an average investment size of $6.1 million, had a weighted average yield on debt
investments of 7.8%, and was invested 92% in senior secured debt, 6% in second lien secured debt and 2% in subordinated debt, preferred and common equity.

As of September 30, 2015, our portfolio totaled $391.3 million and consisted of $335.0 million of senior secured debt, $47.9 million of
second lien secured debt and $8.4 million of subordinated debt, preferred and common equity. Our debt portfolio consisted of 97% variable-rate investments (including 92% with a LIBOR or prime floor) and 3% fixed-rate investments. As of
September 30, 2015, we had one company on non-accrual, representing 1.6% and 0.9% of our overall portfolio on a cost and fair value basis, respectively. Overall, the portfolio had net unrealized depreciation of $6.0 million. Our overall
portfolio consisted of 76 companies with an average investment size of $5.1 million, had a weighted average yield on debt investments of 7.9%, and was invested 86% in senior secured debt, 12% in second lien secured debt and 2% in subordinated debt,
preferred and common equity.

For the fiscal year ended September 30, 2016, we invested $364.4 million of investments in 37 new and 25
existing portfolio companies with a weighted average yield on debt investments of 7.8%. Sales and repayments of investments for the year ended September 30, 2016 totaled $164.2 million.

For the fiscal year ended September 30, 2015, we invested $224.2 million of investments in 32 new and 34 existing portfolio companies with
a weighted average yield on debt investments of 7.7%. Sales and repayments of investments for the year ended September 30, 2015 totaled $195.0 million.

For the fiscal year ended September 30, 2014, we invested $248.1 million of investments in 36 new and 33 existing portfolio companies with
a weighted average yield on debt investments of 8.2%. Sales and repayments of investments for the year ended September 30, 2014 totaled $225.6 million.

CRITICAL ACCOUNTING POLICIES

The
preparation of our Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of our assets and liabilities at the date of the Consolidated Financial Statements and
the reported amounts of income and expenses during the reported periods. In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements have been
included. Actual results could differ from these estimates due to changes in the economic and regulatory environment, financial markets and any other parameters used in determining such estimates and assumptions. We may reclassify certain prior
period amounts to conform to the current period presentation. We have eliminated all intercompany balances and transactions. References to ASC serve as a single source of accounting literature. Subsequent events are evaluated and disclosed as
appropriate for events occurring through the date the Consolidated Financial Statements are issued. In addition to the discussion below, we describe our critical accounting policies in the notes to our Consolidated Financial Statements.

Valuation of Portfolio Investments

We expect that there may not be readily available market values for many of our investments which are or will be in our portfolio, and we value
such investments at fair value as determined in good faith by or under the direction of our board of directors using a documented valuation policy and a consistently applied valuation process, as described in this Report. With respect to investments
for which there is no readily available market value, the factors that the board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio
companys ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a
purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that
do not have a readily available market value, the price used in an actual transaction may be different than our valuation and the difference may be material.

Our investments generally consist of illiquid securities, including debt and equity investments. With respect to investments for which market
quotations are not readily available, or for which market quotations are deemed not reflective of the fair value, our board of directors undertakes a multi-step valuation process each quarter, as described below:



| | (1) | Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Investment Adviser responsible for the portfolio investment;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Preliminary valuation conclusions are then documented and discussed with the management of our Investment Adviser;
| | --- | ------------------------------------------------------------------------------------------------------------------



| | (3) | Our board of directors also engages independent valuation firms to conduct independent appraisals of our investments for which market quotations are not readily available or are readily available but deemed not
reflective of the fair value of the investment. The independent valuation firms review managements preliminary valuations in light of their own independent assessment and also in light of any market quotations obtained from an independent
pricing service, broker, dealer or market maker;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | The audit committee of our board of directors reviews the preliminary valuations of our Investment Adviser and those of the independent valuation firms on a quarterly basis, periodically assesses the valuation
methodologies of the independent valuation firms, and responds to and supplements the valuation recommendations of the independent valuation firms to reflect any comments; and
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Our board of directors discusses these valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of our Investment Adviser, the respective independent valuation firms
and the audit committee.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our board of directors generally uses market quotations to assess the value of our investments for
which market quotations are readily available. We obtain these market values from independent pricing services or at bid prices obtained from at least two brokers or dealers, if available, or otherwise from a principal market maker or a primary
market dealer. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may
independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available.



36



---

##### Table of Contents

Fair value, as defined under ASC 820, is the price that we would receive upon selling an
investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment or liability. ASC 820 emphasizes that valuation techniques maximize the use of observable
market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable.
Observable inputs reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of us. Unobservable inputs reflect the assumptions market participants would use in
pricing an asset or liability based on the best information available to us on the reporting period date.

ASC 820 classifies the inputs
used to measure these fair values into the following hierarchies:



|         |  |                                                                                                                                                                                                                                                                                                                                                                  
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1: |  | Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities, accessible by us at the measurement date.                                                                                                                                                                                                                      
|         | 
|Level 2: |  | Inputs that are quoted prices for similar assets or liabilities in active markets, or that are quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term, if applicable, of the financial instrument.
|         | 
|Level 3: |  | Inputs that are unobservable for an asset or liability because they are based on our own assumptions about how market participants would price the asset or liability.                                                                                                                                                                                           

A financial instruments categorization within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. Generally, most of our investments and our Credit Facility are classified as Level 3. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily
available market value, the price used in an actual transaction may be different than our valuation and those differences may be material.

In addition to using the above inputs in cash equivalents, investments and our Credit Facility valuations, we employ the valuation policy
approved by our board of directors that is consistent with ASC 820. Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.

The carrying value of our consolidated financial liabilities approximates fair value. We adopted ASC 825-10, which provides companies with an
option to report selected financial assets and liabilities at fair value, and made an irrevocable election to apply ASC 825-10 to our Credit Facility. We elected to use the fair value option for our Credit Facility to align the measurement
attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. Due to that election and in accordance with GAAP, we incurred expenses of $0.9 million, $2.3 million and $0.7 million,
relating to amendment fees on the Credit Facility during the years ended September 30, 2016, 2015 and 2014, respectively. ASC 825-10 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect on earnings of a companys choice to use fair value. ASC 825-10 also requires entities to display the fair value of the
selected assets and liabilities on the face of the Consolidated Statements of Assets and Liabilities and changes in fair value of the Credit Facility are reported in our Consolidated Statements of Operations. We elected not to apply ASC 825-10 to
any other financial assets or liabilities. For the fiscal years ended September 30, 2016, 2015 and 2014, our Credit Facility had a net change in unrealized depreciation (appreciation) of $0.5 million, $0.5 million and $(0.5) million,
respectively. As of September 30, 2016 and 2015, the net unrealized depreciation on our Credit Facility totaled $0.5 million and zero, respectively. We use a nationally recognized independent valuation service to measure the fair value of our
Credit Facility in a manner consistent with the valuation process that the board of directors uses to value our investments.

Revenue Recognition

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt investments
with contractual PIK interest, which represents interest accrued and added to the loan balance that generally becomes due at maturity, we will generally not accrue PIK interest when the portfolio company valuation indicates that such PIK interest is
not collectable. We do not accrue as a receivable interest on loans and debt investments if we have reason to doubt our ability to collect such interest. Loan origination fees, OID, market discount or premium and deferred financing costs on
liabilities, which we do not fair value, are capitalized and then accreted or amortized using the effective interest method as interest income. We record prepayment penalties on loans and debt investments as income. Dividend income, if any, is
recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts.

Net Realized Gains or Losses and Net
Change in Unrealized Appreciation or Depreciation

We measure realized gains or losses by the difference between the net proceeds
from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and
prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in fair value of our portfolio investments and Credit Facility during the reporting period, including any reversal of previously recorded unrealized
appreciation or depreciation, when gains or losses are realized.

Foreign Currency Translation

Our books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:

1. Fair value of investment securities, other assets and liabilities  at the exchange rates prevailing at the end of the applicable
period; and

2. Purchases and sales of investment securities, income and expenses  at the exchange rates prevailing on the respective
dates of such transactions.

Although net assets and fair values are presented based on the applicable foreign exchange rates described
above, we do not isolate that portion of the results of operations due to changes in foreign exchange rates on investments, other assets and debt from the fluctuations arising from changes in fair values of investments and liabilities held. Such
fluctuations are included with the net realized and unrealized gain or loss from investments and liabilities.

Payment-in-Kind Interest or PIK

We have investments in our portfolio which contain a PIK interest provision. PIK interest is added to the principal balance of the
investment and is recorded as income. In order for us to maintain our ability to be treated as a RIC for federal income tax purposes, substantially all of this income must be paid out to stockholders in the form of dividends for U.S. federal income
tax purposes, even though we have not collected any cash with respect to interest on PIK securities.



37



---

##### Table of Contents

Federal Income Taxes

We have elected to be treated, and intend to qualify annually to maintain our election to be treated, as a RIC under Subchapter M of the Code.
To maintain our RIC tax election, we must, among other requirements, meet certain annual source-of-income and quarterly asset diversification requirements. We also must annually distribute dividends for U.S. federal income tax purposes to our
stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of the sum of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, or
investment company taxable income, determined without regard to any deduction for dividends paid.

Although not required for us to maintain
our RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we must distribute to our stockholders in respect of each calendar year of an amount generally at least equal to the sum of
(1) 98% of our net ordinary income for the calendar year, (2) 98.2% of the sum of our net capital gain income (i.e., the excess, if any, of capital gains over capital losses) for the one-year period ending on October 31 of the
calendar year plus (3) the sum of any net ordinary income plus net capital gain income for preceding years that was not distributed during such years and on which we paid no federal income tax. In addition, although we may distribute realized
net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we have retained and may continue to
retain such net capital gains or investment company taxable income, subject to maintaining our ability to be treated as a RIC for federal income tax purposes, to provide us with additional liquidity.

Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income
and net realized gains recognized for financial reporting purposes. Differences between tax regulations and GAAP may be permanent or temporary. Permanent differences are reclassified among capital accounts in the Consolidated Financial Statements to
reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.

We have formed and expect to continue to form certain taxable subsidiaries, or the Taxable Subsidiaries, which are taxed as corporations for
federal income tax purposes. Accordingly, the Taxable Subsidiaries will pay income taxes at regular corporate income tax rates. These Taxable Subsidiaries allow us to hold equity securities of portfolio companies organized as pass-through entities
while continuing to satisfy the requirements of a RIC under the Code.

RESULTS OF OPERATIONS

Set forth below are the results of operations for the fiscal years ended September 30, 2016, 2015 and 2014.

Investment Income

Investment income
for the fiscal year ended September 30, 2016 was $46.3 million and was attributable to $36.4 million from senior secured debt, $6.1 million from second lien secured debt and $3.8 million from subordinated debt (including $3.3 million from
settlement proceeds). The increase in investment income over the prior year was primarily due to the growth of our portfolio.

Investment
income for the fiscal year ended September 30, 2015 was $30.4 million and was attributable to $23.5 million from senior secured debt, $5.7 million from second lien secured debt and $1.2 million from subordinated debt. Investment income was
relatively the same compared to the prior year due to investing in debt with lower yields.

Investment income for the fiscal year ended
September 30, 2014 was $30.4 million and was attributable to $24.5 million from senior secured debt, $4.2 million from second lien secured debt and $1.7 million from subordinated debt.

Expenses

Expenses for the fiscal
year ended September 30, 2016 totaled $19.0 million. Base management fee for the same period totaled $5.0 million, incentive fee totaled $4.8 million (including $1.1 million on net unrealized gains accrued but not payable), Credit Facility
expenses totaled $5.8 million (including $0.9 million of Credit Facility amendment expenses) and general and administrative expenses totaled $3.4 million. The increase in expenses over the prior year was primarily due to increases in base management
and incentive fees as a result from the growth of our portfolio.

Expenses for the fiscal year ended September 30, 2015 totaled $12.7
million. Base management fee for the same period totaled $3.6 million, incentive fee totaled $1.1 million (including $(0.4) million on net realized gains and $(0.7) million on net unrealized gains accrued but not payable), Credit Facility expenses
totaled $5.6 million (including $2.3 million of Credit Facility amendment expenses), general and administrative expenses totaled $2.0 million and excise taxes were $0.4 million. The decrease in expenses over the prior year was primarily due to a
reduction in the accrual of incentive fees offset by increased Credit Facility amendment costs.

Expenses for the fiscal year ended
September 30, 2014 totaled $13.7 million. Base management fee for the same period totaled $3.7 million, incentive fee totaled $3.5 million (including $0.1 million on net unrealized gains accrued but not payable), Credit Facility expenses
totaled $4.2 million (including $0.7 million of Credit Facility amendment expenses), general and administrative expenses totaled $1.8 million and excise taxes were $0.5 million.

Net Investment Income

Net investment
income totaled $27.3 million or $1.02 per share, $17.7 million or $1.08 per share and $16.6 million or $1.12 per share, for the fiscal years ended September 30, 2016, 2015 and 2014, respectively. Although the net investment income increased,
the net investment income per share for fiscal year ended September 30, 2016 decreased compared to the prior year primarily due to the issuance of new shares in connection with our acquisition of MCG in August 2015.

Net Realized Gains or Losses

Sales
and repayments of investments for the fiscal years ended September 30, 2016, 2015 and 2014 totaled $164.2 million, $195.0 million and $225.6 million, respectively. Net realized (losses) gains totaled $(1.4) million, $0.4 million and $2.9
million for the same periods, respectively. Although the net investment income increased, the decrease in realized gains for fiscal year ended September 30, 2016 compared to the prior year was driven by changes in market conditions for our
investments.

Unrealized Appreciation or Depreciation on Investments and Credit Facility

For the fiscal years ended September 30, 2016, 2015 and 2014, we reported unrealized appreciation (depreciation) on investments of $7.0
million, $(6.1) million and $1.6 million, respectively. As of September 30, 2016 and 2015, net unrealized appreciation (depreciation) on investments totaled $1.0 million and $(6.0) million, respectively. The net change in unrealized
appreciation (depreciation) on our investments for fiscal year ended September 30, 2016 compared to the prior year was driven primarily by changes in the capital market conditions, financial performance of certain portfolio companies, and the
reversal of unrealized depreciation (appreciation) of investments sold.

For the fiscal years ended September 30, 2016, 2015 and 2014,
our Credit Facility had a change in unrealized depreciation (appreciation) of $0.5 million, $0.5 million and $(0.5) million, respectively. As of September 30, 2016 and 2015, net unrealized depreciation on our Credit Facility totaled $0.5
million and zero, respectively. The change for fiscal year ended September 30, 2016 compared to the prior year was due to changes in the capital markets.



38



---

##### Table of Contents

Net Change in Net Assets Resulting from Operations

Net change in net assets resulting from operations totaled $33.5 million or $1.25 per share, $12.5 million or $0.77 per share and $20.5 million
or $1.38 per share, for the fiscal years ended September 30, 2016, 2015 and 2014, respectively. The increase in the net change in net assets from operations for fiscal year ended September 30, 2016 compared to the prior year reflects the
change in portfolio investment valuation during the reporting period.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital resources are derived from public offerings, our Credit Facility, cash flows from operations, including investment
sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and payments of fees and other operating expenses we incur. We have used, and expect to continue to use, our Credit
Facility, the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives.

Funding Is multi-currency Credit Facility with the Lenders was $350 million as of September 30, 2016, subject to satisfaction of
certain conditions and the regulatory restrictions that the 1940 Act imposes on us as a BDC, has an interest rate spread above LIBOR of 200 basis points, a maturity date of August 2020 and a revolving period that ends in August 2018. As of
September 30, 2016 and 2015, Funding I had $232.9 million and $29.6 million of outstanding borrowings under the Credit Facility, respectively. The Credit Facility had a weighted average interest rate of 2.57% and 2.20%, excluding the undrawn
commitment fees of 0.375% and 0.75% as of September 30, 2016 and 2015, respectively. The annualized weighted average cost of debt for the fiscal years ended September 30, 2016, 2015 and 2014, inclusive of the fee on the undrawn commitment
on the Credit Facility but excluding amendment costs, was 3.51%, 2.62% and 2.35%, respectively. As of September 30, 2016 and 2015, we had $117.1 million and $260.4 million of unused borrowing capacity under our Credit Facility, respectively,
subject to the regulatory restrictions.

During the revolving period, the Credit Facility bears interest at LIBOR plus 200 basis points and,
after the revolving period, the rate sets to LIBOR plus 425 basis points for the remaining two years, maturing in August 2020. The Credit Facility is secured by all of the assets of Funding I. Both PennantPark Floating Rate Capital Ltd. and Funding
I have made customary representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities.

The Credit Facility contains covenants, including, but not limited to, restrictions of loan size, currency types and amounts, industry
requirements, average life of loans, geographic and individual portfolio concentrations, minimum portfolio yield and loan payment frequency. Additionally, the Credit Facility requires the maintenance of a minimum equity investment in Funding I and
income ratio as well as restrictions on certain payments and issuance of debt. For instance, we must maintain at least $25 million in equity and must maintain an interest coverage ratio of at least 125%. The Credit Facility compliance reporting is
prepared on a basis of accounting other than GAAP. As of September 30, 2016, we were in compliance with the covenants relating to our Credit Facility.

We own 100% of the equity interest in Funding I and treat the indebtedness of Funding I as our leverage. In accordance with the 1940 Act, with
certain limited exceptions, we are only allowed to borrow amounts such that we are in compliance with our asset coverage ratio after such borrowing. Our Investment Adviser serves as collateral manager to Funding I under the Credit Facility.

Our interest in Funding I (other than the management fee) is subordinate in priority of payment to every other obligation of Funding I and is
subject to certain payment restrictions set forth in the Credit Facility. We may receive cash distributions on our equity interests in Funding I only after it has made (1) all required cash interest and, if applicable, principal payments to the
Lenders, (2) required administrative expenses and (3) claims of other unsecured creditors of Funding I. We cannot assure you that there will be sufficient funds available to make any distributions to us or that such distributions will meet
our expectations from Funding I. The Investment Adviser has irrevocably directed that the management fee owed with respect to such services is to be paid to the Company so long as the Investment Adviser remains the collateral manager.

We may raise equity or debt capital through both registered offerings and private offerings of securities, securitizing a portion of our
investments among other considerations or mergers and acquisitions. Furthermore, our Credit Facility availability depends on various covenants and restrictions as discussed in the preceding paragraphs. The primary use of existing funds and any funds
raised in the future is expected to be for repayment of indebtedness, investments in portfolio companies, cash distributions to our stockholders or for other general corporate purposes. For the years ended September 30, 2016, 2015 and 2014, we
issued zero, 11.8 million and zero shares, respectively. As a result, we raised approximately zero, $164.7 million and zero dollars in gross proceeds from issuances of our equity capital.

On September 30, 2016 and 2015, we had cash equivalents of $28.9 million and $21.4 million, respectively, available for investing and
general corporate purposes. We believe our liquidity and capital resources are sufficient to take advantage of market opportunities.

Our
operating activities used cash of $165.5 million for the year ended September 30, 2016, and our financing activities provided cash of $172.8 million for the same period. Our operating activities used cash primarily for our investment activities
and our financing activities provided cash primarily from net borrowings under the Credit Facility.

Our operating activities used cash of
$2.2 million for the year ended September 30, 2015, and our financing activities provided cash of $10.5 million for the same period. Our operating activities used cash primarily for our investment activities and our financing activities
provided cash primarily from the MCG merger.

Our operating activities used cash of $22.3 million for the year ended September 30,
2014, and our financing activities provided cash of $30.8 million for the same period. Our operating activities used cash primarily for our investment activities and our financing activities provided cash primarily from net draws under the Credit
Facility.



39



---

##### Table of Contents

Contractual Obligations

A summary of our significant contractual payment obligations as of September 30, 2016, including borrowings under our Credit Facility and
other contractual obligations, is as follows:



|                              |  |                                   |       |  |                  |   |   |           |  |   |           |  |  |                   |       |  |  |   |     | 
|----------------------------- |  | --------------------------------- | ----- |  | ---------------- | - | - | --------- |  | - | --------- |  |  | ----------------- | ----- |  |  | - | --- | 
|                              |  | Payments due by period (millions) |      
|                              |  | Total                             |       |  | Less than 1 year |   |   | 1-3 years |  |   | 3-5 years |  |  | More than 5 years |      
|Credit Facility               |  | $                                 | 232.9 |  |                  | $ |  |           |  | $ |          |  |  | $                 | 232.9 |  |  | $ |    | 
|Unfunded investments (1)      |  |                                   | 20.0  |  |                  |   |  |           |  |   | 0.1       |  |  |                   | 13.5  |  |  |   | 6.4 | 
|                              |  |                                   |       |  |                  |   |   |           |  |   |           |  |  |                   |       |  |  |   |     | 
|Total contractual obligations |  | $                                 | 252.9 |  |                  | $ |  |           |  | $ | 0.1       |  |  | $                 | 246.4 |  |  | $ | 6.4 | 
|                              |  |                                   |       |  |                  |   |   |           |  |   |           |  |  |                   |       |  |  |   |     | 



|(1) | Unfunded investments are disclosed in the Consolidated Schedule of Investments and Note 12 of our Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

We have entered into certain contracts under which we have material future commitments. Under our Investment Management Agreement, which was
reapproved by our board of directors, including a majority of our directors who are not interested persons of us or the Investment Adviser, in February 2016, PennantPark Investment Advisers serves as our Investment Adviser. Payments under our
Investment Management Agreement in each reporting period are equal to (1) a management fee equal to a percentage of the value of our gross assets and (2) an incentive fee based on our performance.

Under our Administration Agreement, which was reapproved by our board of directors, including a majority of our directors who are not interested
persons of us, in February 2016, the Administrator furnishes us with office facilities and administrative services necessary to conduct our day-to-day operations. If requested to provide managerial assistance to our portfolio companies, we or the
Administrator will be paid an additional amount based on the services provided. Payment under our Administration Agreement is based upon our allocable portion of the Administrators overhead in performing its obligations under our
Administration Agreement, including rent and our allocable portion of the costs of our Chief Compliance Officer, Chief Financial Officer and their respective staffs.

If any of our contractual obligations discussed above are terminated, our costs under new agreements that we enter into may increase. In
addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Management Agreement and our Administration Agreement. Any new investment management
agreement would also be subject to approval by our stockholders.

Off-Balance Sheet Arrangements

We currently engage in no off-balance sheet arrangements other than our funding requirements for the unfunded investments described above.

Distributions

In order to be treated
as a RIC for federal income tax purposes and to not be subject to corporate-level tax on undistributed income or gains, we are required, under Subchapter M of the Code, to annually distribute to stockholders out of the assets legally available for
distribution of an amount generally at least equal to 90% of the sum of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, or investment company taxable income, determined without regard
to any deduction for dividends paid.

Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a
4% nondeductible federal excise tax imposed on RICs, we must distribute to our stockholders in respect of each calendar year of an amount generally at least equal to the sum of (1) 98% of our net ordinary income for the calendar year,
(2) 98.2% of our capital gain net income (i.e., the excess, if any, of capital gains over capital losses) for the one-year period ending on October 31 of the calendar year plus (3) the sum of any net ordinary income plus capital gain
net income for preceding years that was not distributed during such years and on which we paid no federal income tax. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term
capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we have retained and may retain such net capital gains or investment company taxable income in the future, subject
to maintaining our ability to be treated as a RIC for federal income tax purposes, to provide us with additional liquidity.

During the
years ended September 30, 2016, 2015 and 2014, we declared distributions of $1.14, $1.12 and $1.08 per share, respectively, for total distributions of $30.5 million, $18.9 million and $16.1 million, respectively. We monitor available net
investment income to determine if a tax return of capital may occur for the fiscal year. To the extent our taxable earnings fall below the total amount of our distributions for any given fiscal year, common stockholders will be notified of the
portion of those distributions deemed to be a tax return of capital. Tax characteristics of all distributions will be reported to stockholders subject to information reporting on Form 1099-DIV after the end of the calendar year and in our periodic
reports filed with the SEC.

We intend to continue to make monthly distributions to our stockholders. Our monthly distributions, if any, are
determined by our board of directors quarterly.

We maintain an opt out dividend reinvestment plan for our common stockholders.
As a result, if we declare a distribution, then stockholders cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically opt out of the dividend reinvestment plan so as to
receive cash distributions.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or
to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in
future credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of RIC tax status. We cannot assure stockholders that they will receive any distributions
at a particular level.



40



---

##### Table of Contents

|Item 7A. | Quantitative And Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------

We are subject to financial
market risks, including changes in interest rates. As of September 30, 2016, our debt portfolio consisted of 99% variable-rate investments (including 94% with a LIBOR or prime floor) and 1% fixed-rate investments. The variable-rate loans are
usually based on a LIBOR rate and typically have durations of three months, after which they reset to current market interest rates. Variable-rate investments subject to a floor generally reset by reference to the current market index after one to
nine months only if the index exceeds the floor. In regards to variable-rate instruments with a floor, we do not benefit from increases in interest rates until such rates exceed the floor and thereafter benefit from market rates above any such
floor. In contrast, our cost of funds, to the extent it is not fixed, will fluctuate with changes in interest rates since it has no floor.

Assuming that the most recent Consolidated Statement of Assets and Liabilities was to remain constant, and no actions were taken to alter the
existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates:



Change In Interest Rates



Change In Interest Income,Net Of Interest Expense(in thousands)




Change In Interest Income,Net Of Interest ExpensePer ShareUp 1%



$
209




$
0.01Up 2%



$
3,858




$
0.14Up 3%



$
7,507




$
0.28Up 4%



$
11,156




$
0.42


Although management believes that this measure is indicative of our sensitivity to interest rate changes,
it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the Consolidated Statements of Assets and Liabilities and other business developments that could affect net increase in net assets
resulting from operations or net investment income. Accordingly, no assurances can be given that actual results would not differ materially from those shown above.

Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow
funds and the rate at which we invest these funds, as well as our level of leverage. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income or
net assets.

We may hedge against interest rate and foreign currency fluctuations by using standard hedging instruments such as futures,
options and forward contracts or our Credit Facility subject to the requirements of the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates and foreign currencies, they may
also limit our ability to participate in benefits of lower interest rates or higher exchange rates with respect to our portfolio of investments with fixed interest rates. During the periods covered by this Report, we did not engage in interest rate
hedging activities or foreign currency derivatives hedging activities.



41



---

##### Table of Contents

|Item 8. | Consolidated Financial Statements and Supplementary Data
|------- | --------------------------------------------------------



|                                                                                                        |  |      |    | 
|------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                        |  | Page |   
|Managements Report on Internal Control Over Financial
Reporting                                        |  |      | 43 | 
|                                                                                                        | 
|Report of Independent Registered Public Accounting Firm                                                 |  |      | 44 | 
|                                                                                                        | 
|Report of Independent Registered Public Accounting Firm On Internal Control Over
 Financial Reporting   |  |      | 45 | 
|                                                                                                        | 
|Consolidated Statements of Assets and Liabilities as of September 
30, 2016 and 2015                    |  |      | 46 | 
|                                                                                                        | 
|Consolidated Statements of Operations for the years ended September 
30, 2016, 2015 and 2014            |  |      | 47 | 
|                                                                                                        | 
|Consolidated Statements of Changes in Net Assets for the years ended September 30,
 2016, 2015 and 2014 |  |      | 48 | 
|                                                                                                        | 
|Consolidated Statements of Cash Flows for the years ended September 
30, 2016, 2015 and 2014            |  |      | 49 | 
|                                                                                                        | 
|Consolidated Schedules of Investments as of September 30, 2016 and
2015                                 |  |      | 50 | 
|                                                                                                        | 
|Notes to the Consolidated Financial Statements                                                          |  |      | 56 | 



42



---

##### Table of Contents

Managements Report on Internal Control Over Financial Reporting

The management of PennantPark Floating Rate Capital Ltd., or we, us, our and Company,
is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), and for performing an assessment of the effectiveness of internal control over financial
reporting as of September 30, 2016. Our internal control system is a process designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements.

The Companys internal control over financial reporting includes policies and procedures that pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.
Generally Accepted Accounting Principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the
effectiveness of the Companys internal control over financial reporting as of September 30, 2016. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in 2013Internal ControlIntegrated Framework. Based on the assessment management believes that, as of September 30, 2016, our internal control over financial reporting is effective based on those criteria.

The Companys independent registered public accounting firm has issued an audit report on the effectiveness of our internal control over
financial reporting as of September 30, 2016. This report appears on page 45.



43



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

PennantPark Floating Rate
Capital Ltd. and its Subsidiaries:

We have audited the accompanying consolidated statements of assets and liabilities of PennantPark
Floating Rate Capital Ltd. and its Subsidiaries (collectively referred to as the Company), including the consolidated schedules of investments as of September 30, 2016 and 2015, and the related consolidated statements of operations,
changes in net assets, and cash flows for each of the three years in the period ended September 30, 2016. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of September 30, 2016, by correspondence with the custodians and/or portfolio
companies. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of PennantPark Floating Rate Capital Ltd. and its Subsidiaries as of September 30, 2016 and 2015, and the results of their operations, changes in net assets and their cash flows for the three years in the period then ended
September 30, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), PennantPark Floating Rate Capital Ltd. and its Subsidiaries internal control over financial reporting as of September 30, 2016, based on criteria established
inInternal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013, and our report dated November 22, 2016 expressed an unqualified opinion on the effectiveness of
the Companys internal control over financial reporting.

/s/ RSM US LLP

New York, New York

November 22, 2016



44



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

On Internal Control Over Financial Reporting

The Board of Directors and Stockholders

PennantPark Floating Rate
Capital Ltd. and its Subsidiaries:

We have audited PennantPark Floating Rate Capital Ltd. and its Subsidiaries (collectively referred
to as the Company) internal control over financial reporting as of September 30, 2016, based on criteria established inInternal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in 2013. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, PennantPark Floating Rate Capital Ltd. and its Subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of September 30, 2016, based on criteria established inInternal ControlIntegrated Frameworkissued by COSO in 2013.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
statements of assets and liabilities of PennantPark Floating Rate Capital Ltd. and its Subsidiaries, including the schedules of investments as of September 30, 2016 and 2015, and the related consolidated statements of operations, changes in net
assets, and cash flows for each of the three years in the period ended September 30, 2016 and our report dated November 22, 2016 expressed an unqualified opinion on those financial statements.

/s/ RSM US LLP

New York, New York

November 22, 2016



45



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES



|                                                                                                                     |  |                    |             |   |                    |   |             |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ------------------ | - | ----------- | -
|                                                                                                                     |  | September 30, 2016 |             |   | September 30, 2015 |  
|Assets                                                                                                               |  |                    |             |   |                    |   |             |  
|Investments at fair value                                                                                            |  |                    |             |   |                    |   |             |  
|Non-controlled, non-affiliated investments (cost$597,910,267 and $394,561,175,
respectively)                        |  | $                  | 598,887,525 |   |                    | $ | 388,535,383 |  
|Controlled, affiliated investments (cost$0 and $2,777,132, respectively)                                            |  |                    |            |   |                    |   | 2,776,507   |  
|                                                                                                                     |  |                    |             |   |                    |   |             |  
|Total of investments (cost$597,910,267 and $397,338,307, respectively)                                              |  |                    | 598,887,525 |   |                    |   | 391,311,890 |  
|Cash and cash equivalents (cost$28,903,359 and $21,428,514, respectively)                                           |  |                    | 28,910,973  |   |                    |   | 21,428,514  |  
|Interest receivable                                                                                                  |  |                    | 2,480,406   |   |                    |   | 1,959,404   |  
|Prepaid expenses and other assets                                                                                    |  |                    | 1,141,191   |   |                    |   | 1,420,529   |  
|                                                                                                                     |  |                    |             |   |                    |   |             |  
|Total assets                                                                                                         |  |                    | 631,420,095 |   |                    |   | 416,120,337 |  
|                                                                                                                     |  |                    |             |   |                    |   |             |  
|Liabilities                                                                                                          |  |                    |             |   |                    |   |             |  
|Distributions payable                                                                                                |  |                    | 2,539,357   |   |                    |   | 2,539,357   |  
|Payable for investments purchased                                                                                    |  |                    | 14,935,970  |   |                    |   | 9,367,500   |  
|Credit Facility payable (cost$232,907,500 and $29,600,000, respectively) (See Notes 5 and
11)                       |  |                    | 232,389,498 |   |                    |   | 29,600,000  |  
|Interest payable on Credit Facility                                                                                  |  |                    | 531,926     |   |                    |   | 224,633     |  
|Management fee payable (See Note 3)                                                                                  |  |                    | 1,458,625   |   |                    |   | 956,115     |  
|Performance-based incentive fee payable (See Note 3)                                                                 |  |                    | 3,454,914   |   |                    |   | 2,936       |  
|Accrued other expenses                                                                                               |  |                    | 202,977     |   |                    |   | 539,347     |  
|                                                                                                                     |  |                    |             |   |                    |   |             |  
|Total liabilities                                                                                                    |  |                    | 255,513,267 |   |                    |   | 43,229,888  |  
|                                                                                                                     |  |                    |             |   |                    |   |             |  
|Commitments and contingencies (See Note 12)                                                                          |  |                    |             |   |                    |   |             |  
|Net Assets                                                                                                           |  |                    |             |   |                    |   |             |  
|Common stock, 26,730,074 shares issued and outstanding.Par value $0.001 per share and
100,000,000 shares authorized. |  |                    | 26,730      |   |                    |   | 26,730      |  
|Paid-in capital in excess of par value                                                                               |  |                    | 371,194,366 |   |                    |   | 371,502,801 |  
|Undistributed net investment income                                                                                  |  |                    | 4,559,646   |   |                    |   | 6,991,473   |  
|Accumulated net realized (loss) gain on investments                                                                  |  |                    | (1,376,788  | ) |                    |   | 395,862     |  
|Net unrealized appreciation (depreciation) on investments                                                            |  |                    | 984,872     |   |                    |   | (6,026,417  | )
|Net unrealized depreciation on Credit Facility                                                                       |  |                    | 518,002     |   |                    |   |            |  
|                                                                                                                     |  |                    |             |   |                    |   |             |  
|Total net assets                                                                                                     |  | $                  | 375,906,828 |   |                    | $ | 372,890,449 |  
|                                                                                                                     |  |                    |             |   |                    |   |             |  
|Total liabilities and net assets                                                                                     |  | $                  | 631,420,095 |   |                    | $ | 416,120,337 |  
|                                                                                                                     |  |                    |             |   |                    |   |             |  
|Net asset value per share                                                                                            |  | $                  | 14.06       |   |                    | $ | 13.95       |  
|                                                                                                                     |  |                    |             |   |                    |   |             |  

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



46



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                        |  | Years Ended September 30, |           
|                                                                                        |  | 2016                      |            |   | 2015 |   |            | 2014 | 
|Investment income:                                                                      |  |                           |            |   |      |   |            |      |  |   |            |  
|From non-controlled, non-affiliated investments:                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Interest                                                                                |  | $                         | 40,561,694 |   |      | $ | 29,203,963 |      |  | $ | 29,256,441 |  
|Other income                                                                            |  |                           | 2,334,330  |   |      |   | 1,151,336  |      |  |   | 1,100,391  |  
|Settlement proceeds                                                                     |  |                           | 3,299,764  |   |      |   |           |      |  |   |           |  
|From controlled, affiliated investments:                                                |  |                           |            |   |      |   |            |      |  |   |            |  
|Interest                                                                                |  |                           | 105,502    |   |      |   |           |      |  |   |           |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Total investment income                                                                 |  |                           | 46,301,290 |   |      |   | 30,355,299 |      |  |   | 30,356,832 |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Expenses:                                                                               |  |                           |            |   |      |   |            |      |  |   |            |  
|Base management fee (See Note 3)                                                        |  |                           | 5,015,077  |   |      |   | 3,572,614  |      |  |   | 3,702,826  |  
|Performance-based incentive fee (See Note 3)                                            |  |                           | 4,791,574  |   |      |   | 1,114,972  |      |  |   | 3,464,344  |  
|Interest and expenses on the Credit Facility (See Note 11)                              |  |                           | 4,923,219  |   |      |   | 3,251,761  |      |  |   | 3,471,347  |  
|Administrative services expenses (See Note 3)                                           |  |                           | 1,148,281  |   |      |   | 837,708    |      |  |   | 879,000    |  
|Other general and administrative expenses                                               |  |                           | 2,179,257  |   |      |   | 1,176,769  |      |  |   | 1,011,285  |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Expenses before provision for taxes and amendment costs                                 |  |                           | 18,057,408 |   |      |   | 9,953,824  |      |  |   | 12,528,802 |  
|Provision for taxes                                                                     |  |                           |           |   |      |   | 440,000    |      |  |   | 479,425    |  
|Credit Facility amendment costs (See Notes 5 and 11)                                    |  |                           | 907,722    |   |      |   | 2,301,478  |      |  |   | 712,930    |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Total expenses                                                                          |  |                           | 18,965,130 |   |      |   | 12,695,302 |      |  |   | 13,721,157 |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Net investment income                                                                   |  |                           | 27,336,160 |   |      |   | 17,659,997 |      |  |   | 16,635,675 |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Realized and unrealized (loss) gain on investments and Credit Facility:                 |  |                           |            |   |      |   |            |      |  |   |            |  
|Net realized (loss) gain on non-controlled, non-affiliated investments                  |  |                           | (1,376,788 | ) |      |   | 395,862    |      |  |   | 2,873,525  |  
|Net change in unrealized appreciation (depreciation) on:                                |  |                           |            |   |      |   |            |      |  |   |            |  
|Non-controlled, non-affiliated investments                                              |  |                           | 7,011,289  |   |      |   | (6,100,614 | )    |  |   | 1,553,771  |  
|Credit Facility depreciation (appreciation) (See Note 5)                                |  |                           | 518,002    |   |      |   | 549,000    |      |  |   | (549,000   | )
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Net change in unrealized appreciation (depreciation) on investments and Credit
Facility |  |                           | 7,529,291  |   |      |   | (5,551,614 | )    |  |   | 1,004,771  |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Net realized and unrealized gain (loss) from investments and Credit Facility            |  |                           | 6,152,503  |   |      |   | (5,155,752 | )    |  |   | 3,878,296  |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Net increase in net assets resulting from operations                                    |  | $                         | 33,488,663 |   |      | $ | 12,504,245 |      |  | $ | 20,513,971 |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Net increase in net assets resulting from operations per common share                   |  | $                         | 1.25       |   |      | $ | 0.77       |      |  | $ | 1.38       |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Net investment income per common share                                                  |  | $                         | 1.02       |   |      | $ | 1.08       |      |  | $ | 1.12       |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



47



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS



|                                                                        |  |                           |             |   |      |   |             |      |  |   |             |  
|----------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                        |  | Years Ended September 30, |            
|                                                                        |  | 2016                      |             |   | 2015 |   |             | 2014 | 
|Net increase in net assets from operations:                             |  |                           |             |   |      |   |             |      |  |   |             |  
|Net investment income                                                   |  | $                         | 27,336,160  |   |      | $ | 17,659,997  |      |  | $ | 16,635,675  |  
|Net realized (loss) gain on investments                                 |  |                           | (1,376,788  | ) |      |   | 395,862     |      |  |   | 2,873,525   |  
|Net change in unrealized appreciation (depreciation) on investments     |  |                           | 7,011,289   |   |      |   | (6,100,614  | )    |  |   | 1,553,771   |  
|Net change in unrealized depreciation (appreciation) on Credit Facility |  |                           | 518,002     |   |      |   | 549,000     |      |  |   | (549,000    | )
|                                                                        |  |                           |             |   |      |   |             |      |  |   |             |  
|Net increase in net assets resulting from operations                    |  |                           | 33,488,663  |   |      |   | 12,504,245  |      |  |   | 20,513,971  |  
|                                                                        |  |                           |             |   |      |   |             |      |  |   |             |  
|Distributions to stockholders:                                          |  |                           |             |   |      |   |             |      |  |   |             |  
|Distribution of net investment income                                   |  |                           | (30,076,422 | ) |      |   | (15,976,507 | )    |  |   | (12,477,719 | )
|Distribution of realized gains                                          |  |                           | (395,862    | ) |      |   | (2,882,909  | )    |  |   | (3,574,936  | )
|                                                                        |  |                           |             |   |      |   |             |      |  |   |             |  
|Total distributions to stockholders                                     |  |                           | (30,472,284 | ) |      |   | (18,859,416 | )    |  |   | (16,052,655 | )
|                                                                        |  |                           |             |   |      |   |             |      |  |   |             |  
|Capital transactions:                                                   |  |                           |             |   |      |   |             |      |  |   |             |  
|Acquisition of MCG assets (See Note 13)                                 |  |                           |            |   |      |   | 164,717,910 |      |  |   |            |  
|                                                                        |  |                           |             |   |      |   |             |      |  |   |             |  
|Net increase in net assets resulting from capital transactions          |  |                           |            |   |      |   | 164,717,910 |      |  |   |            |  
|                                                                        |  |                           |             |   |      |   |             |      |  |   |             |  
|Net increase in net assets                                              |  |                           | 3,016,379   |   |      |   | 158,362,739 |      |  |   | 4,461,316   |  
|Net assets:                                                             |  |                           |             |   |      |   |             |      |  |   |             |  
|Beginning of year                                                       |  |                           | 372,890,449 |   |      |   | 214,527,710 |      |  |   | 210,066,394 |  
|                                                                        |  |                           |             |   |      |   |             |      |  |   |             |  
|End of year                                                             |  | $                         | 375,906,828 |   |      | $ | 372,890,449 |      |  | $ | 214,527,710 |  
|                                                                        |  |                           |             |   |      |   |             |      |  |   |             |  
|Undistributed net investment income, end of year                        |  | $                         | 4,559,646   |   |      | $ | 6,991,473   |      |  | $ | 4,878,091   |  
|                                                                        |  |                           |             |   |      |   |             |      |  |   |             |  
|Capital share activity:                                                 |  |                           |             |   |      |   |             |      |  |   |             |  
|Shares issued                                                           |  |                           |            |   |      |   | 11,832,018  |      |  |   |            |  
|                                                                        |  |                           |             |   |      |   |             |      |  |   |             |  

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



48



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------------ | - | ---- | - | ------------ | ---- |  | - | ------------ | -
|                                                                                                                        |  | Years Ended September 30, |             
|                                                                                                                        |  | 2016                      |              |   | 2015 |   |              | 2014 | 
|Cash flows from operating activities:                                                                                   |  |                           |              |   |      |   |              |      |  |   |              |  
|Net increase in net assets resulting from operations                                                                    |  | $                         | 33,488,663   |   |      | $ | 12,504,245   |      |  | $ | 20,513,971   |  
|Adjustments to reconcile net increase in net assets resulting from operations to net cash used in
operating activities: |  |                           |              |   |      |   |              |      |  |   |              |  
|Net change in unrealized (appreciation) depreciation on investments                                                     |  |                           | (7,011,289   | ) |      |   | 6,100,614    |      |  |   | (1,553,771   | )
|Net change in unrealized (depreciation) appreciation on Credit Facility                                                 |  |                           | (518,002     | ) |      |   | (549,000     | )    |  |   | 549,000      |  
|Net realized loss (gain) on investments                                                                                 |  |                           | 1,376,788    |   |      |   | (395,862     | )    |  |   | (2,873,525   | )
|Net accretion of discount and amortization of premium                                                                   |  |                           | (1,679,006   | ) |      |   | (1,240,781   | )    |  |   | (1,253,776   | )
|Purchases of investments                                                                                                |  |                           | (364,442,810 | ) |      |   | (224,170,119 | )    |  |   | (248,124,673 | )
|Payment-in-kind interest                                                                                                |  |                           | (108,066     | ) |      |   | (655,580     | )    |  |   | (662,226     | )
|Proceeds from dispositions of investments                                                                               |  |                           | 164,178,802  |   |      |   | 195,049,580  |      |  |   | 225,614,700  |  
|(Increase) decrease in interest receivable                                                                              |  |                           | (521,002     | ) |      |   | (185,534     | )    |  |   | 366,932      |  
|Decrease (increase) in receivable for investments sold                                                                  |  |                           |             |   |      |   | 9,001,938    |      |  |   | (5,342,753   | )
|Decrease (increase) in prepaid expenses and other assets                                                                |  |                           | 279,338      |   |      |   | (315,139     | )    |  |   | 63,378       |  
|Increase (decrease) in payable for investments purchased                                                                |  |                           | 5,568,470    |   |      |   | 6,205,500    |      |  |   | (10,859,588  | )
|Increase (decrease) in interest payable on Credit Facility                                                              |  |                           | 307,293      |   |      |   | (60,273      | )    |  |   | 94,972       |  
|Increase in management fee payable                                                                                      |  |                           | 502,510      |   |      |   | 41,137       |      |  |   | 183,343      |  
|Increase (decrease) in performance-based incentive fee payable                                                          |  |                           | 3,451,978    |   |      |   | (2,177,668   | )    |  |   | 1,016,514    |  
|(Decrease) increase in accrued other expenses                                                                           |  |                           | (336,370     | ) |      |   | (1,358,635   | )    |  |   | 18,480       |  
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|Net cash used in operating activities                                                                                   |  |                           | (165,462,703 | ) |      |   | (2,205,577   | )    |  |   | (22,249,022  | )
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|Cash flows from financing activities:                                                                                   |  |                           |              |   |      |   |              |      |  |   |              |  
|Acquisition of MCG assets (See Note 13)                                                                                 |  |                           |             |   |      |   | 144,981,158  |      |  |   |             |  
|Distributions paid to stockholders                                                                                      |  |                           | (30,472,284  | ) |      |   | (17,660,884  | )    |  |   | (16,015,410  | )
|Borrowings under Credit Facility (See Notes 5 and 11)                                                                   |  |                           | 260,707,500  |   |      |   | 130,700,000  |      |  |   | 148,200,000  |  
|Repayments under Credit Facility (See Notes 5 and 11)                                                                   |  |                           | (57,400,000  | ) |      |   | (247,500,000 | )    |  |   | (101,400,000 | )
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|Net cash provided by financing activities                                                                               |  |                           | 172,835,216  |   |      |   | 10,520,274   |      |  |   | 30,784,590   |  
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|Net increase in cash equivalents                                                                                        |  |                           | 7,372,513    |   |      |   | 8,314,697    |      |  |   | 8,535,568    |  
|Effect of exchange rate changes on cash                                                                                 |  |                           | 109,946      |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents, beginning of year                                                                            |  |                           | 21,428,514   |   |      |   | 13,113,817   |      |  |   | 4,578,249    |  
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|Cash and cash equivalents, end of year                                                                                  |  | $                         | 28,910,973   |   |      | $ | 21,428,514   |      |  | $ | 13,113,817   |  
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|Supplemental disclosure of cash flow information:                                                                       |  |                           |              |   |      |   |              |      |  |   |              |  
|Interest paid                                                                                                           |  | $                         | 4,615,926    |   |      | $ | 3,313,701    |      |  | $ | 3,341,375    |  
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|Taxes paid                                                                                                              |  | $                         | 308,795      |   |      | $ | 430,242      |      |  | $ | 254,753      |  
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|Non-cash exchanges and conversions                                                                                      |  | $                         | 4,843,385    |   |      | $ | 670,283      |      |  | $ | 6,902,784    |  
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|Investments acquired from MCG in exchange for shares issued (See Note 13)                                               |  | $                         |             |   |      | $ | 20,277,132   |      |  | $ |             |  
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|Acquisition of other assets from MCG (See Note 13)                                                                      |  | $                         |             |   |      | $ | 549,031      |      |  | $ |             |  
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  
|Acquisition of other liabilities from MCG (See Note 13)                                                                 |  | $                         |             |   |      | $ | 1,089,411    |      |  | $ |             |  
|                                                                                                                        |  |                           |              |   |      |   |              |      |  |   |              |  

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



49



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2016



|                                                                                  |  |            |  |                                            |  |               |       |   |                                 |  |         |             |  |  |            |  |  |                |            |  |  |   |            |  
|--------------------------------------------------------------------------------- |  | ---------- |  | ------------------------------------------ |  | ------------- | ----- | - | ------------------------------- |  | ------- | ----------- |  |  | ---------- |  |  | -------------- | ---------- |  |  | - | ---------- | -
|Issuer Name                                                                       |  | Maturity   |  | Industry                                   |  | CurrentCoupon |       |   | Basis PointSpreadAboveIndex (1) |  |         | Par /Shares |  |  | Cost       |  |  | Fair Value (2) |           
|Investments in Non-Controlled, Non-Affiliated Portfolio Companies159.3% (3), (4) | 
|First Lien Secured Debt145.9%                                                    | 
|Advanced Cable Communications, LLC                                                |  | 08/09/2021 |  | Telecommunications                         |  |               | 6.75  | % |                                 |  | L+575   |             |  |  | 12,500,000 |  |  | $              | 12,255,990 |  |  | $ | 12,250,000 |  
|Advanced Cable Communications, LLC
(10)                                           |  | 08/09/2021 |  | Telecommunications                         |  |               |      |   |                                 |  |        |             |  |  | 4,000,000  |  |  |                |           |  |  |   | (80,000    | )
|ALG USA Holdings, LLC                                                             |  | 02/28/2019 |  | Hotel, Gaming and Leisure                  |  |               | 7.00  | % |                                 |  | L+575   |             |  |  | 12,064,454 |  |  |                | 12,037,105 |  |  |   | 12,064,454 |  
|Alvogen Pharma US, Inc. (6), (11)                                                 |  | 04/04/2022 |  | Healthcare and Pharmaceuticals             |  |               | 6.00  | % |                                 |  | L+500   |             |  |  | 3,943,925  |  |  |                | 3,925,777  |  |  |   | 3,946,410  |  
|American Bath Group, LLC                                                          |  | 10/02/2023 |  | Consumer Goods: Durable                    |  |               | 6.75  | % |                                 |  | L+575   |             |  |  | 3,000,000  |  |  |                | 2,970,000  |  |  |   | 2,992,500  |  
|American Scaffold                                                                 |  | 03/31/2022 |  | Aerospace and Defense                      |  |               | 7.50  | % |                                 |  | L+650   |             |  |  | 4,937,500  |  |  |                | 4,866,801  |  |  |   | 4,888,125  |  
|AMF Bowling Centers, Inc.                                                         |  | 09/19/2023 |  | Retail                                     |  |               | 6.00  | % |                                 |  | L+500   |             |  |  | 15,000,000 |  |  |                | 14,850,608 |  |  |   | 14,931,300 |  
|AP Gaming I, LLC                                                                  |  | 12/21/2020 |  | Hotel, Gaming and Leisure                  |  |               | 9.25  | % |                                 |  | L+825   |             |  |  | 6,534,878  |  |  |                | 6,462,308  |  |  |   | 6,220,419  |  
|API Technologies Corp.                                                            |  | 04/22/2022 |  | Aerospace and Defense                      |  |               | 7.50  | % |                                 |  | L+650   |             |  |  | 9,975,000  |  |  |                | 9,787,810  |  |  |   | 9,825,375  |  
|Azure Midstream Energy LLC                                                        |  | 11/15/2018 |  | Energy: Oil and Gas                        |  |               | 7.50  | % |                                 |  | L+650   |             |  |  | 5,125,684  |  |  |                | 5,042,414  |  |  |   | 4,228,689  |  
|Blue Bird Body Company                                                            |  | 06/29/2020 |  | Automotive                                 |  |               | 6.50  | % |                                 |  | L+550   |             |  |  | 3,498,670  |  |  |                | 3,462,806  |  |  |   | 3,498,670  |  
|Broder Bros., Co., Tranche A                                                      |  | 06/03/2021 |  | Consumer Goods: Non-Durable                |  |               | 7.00  | % |                                 |  | L+575   |             |  |  | 2,440,000  |  |  |                | 2,397,229  |  |  |   | 2,422,820  |  
|Broder Bros., Co., Tranche B                                                      |  | 06/03/2021 |  | Consumer Goods: Non-Durable                |  |               | 13.50 | % |                                 |  | L+1,225 |             |  |  | 2,460,000  |  |  |                | 2,415,653  |  |  |   | 2,442,679  |  
|Camin Cargo Control, Inc.                                                         |  | 06/30/2021 |  | Transportation: Cargo                      |  |               | 5.75  | % |                                 |  | L+475   |             |  |  | 2,468,750  |  |  |                | 2,448,157  |  |  |   | 2,370,000  |  
|CareCentrix, Inc.                                                                 |  | 07/08/2021 |  | Healthcare and Pharmaceuticals             |  |               | 6.00  | % |                                 |  | L+500   |             |  |  | 4,950,000  |  |  |                | 4,847,215  |  |  |   | 4,863,375  |  
|CBAC Borrower, LLC (8)                                                            |  | 07/02/2020 |  | Hotel, Gaming and Leisure                  |  |               | 8.25  | % |                                 |  | L+700   |             |  |  | 4,962,500  |  |  |                | 4,930,912  |  |  |   | 4,850,844  |  
|CD&R TZ Purchaser, Inc.                                                           |  | 07/21/2023 |  | Consumer Goods: Durable                    |  |               | 7.00  | % |                                 |  | L+600   |             |  |  | 12,500,000 |  |  |                | 12,179,928 |  |  |   | 12,343,750 |  
|Charming Charlie LLC                                                              |  | 12/24/2019 |  | Retail                                     |  |               | 9.00  | % |                                 |  | L+800   |             |  |  | 4,098,750  |  |  |                | 4,061,551  |  |  |   | 3,750,357  |  
|Chicken Soup for the Soul Publishing, LLC                                         |  | 01/08/2019 |  | Media: Advertising, Printing andPublishing |  |               | 7.50  | % |                                 |  | L+625   |             |  |  | 4,828,571  |  |  |                | 4,801,254  |  |  |   | 4,732,000  |  
|Corfin Industries LLC                                                             |  | 11/25/2020 |  | Aerospace and Defense                      |  |               | 10.75 | % |                                 |  | L+975   |             |  |  | 6,272,600  |  |  |                | 6,163,749  |  |  |   | 6,272,600  |  
|Corfin Industries LLC (Revolver) (10)                                             |  | 11/25/2020 |  | Aerospace and Defense                      |  |               |      |   |                                 |  |        |             |  |  | 518,033    |  |  |                |           |  |  |   |           |  
|CRGT Inc.                                                                         |  | 12/21/2020 |  | High Tech Industries                       |  |               | 7.50  | % |                                 |  | L+650   |             |  |  | 10,531,671 |  |  |                | 10,451,145 |  |  |   | 10,505,342 |  
|Curo Health Services Holdings, Inc.                                               |  | 02/07/2022 |  | Healthcare and Pharmaceuticals             |  |               | 6.50  | % |                                 |  | L+550   |             |  |  | 1,970,000  |  |  |                | 1,953,997  |  |  |   | 1,970,000  |  
|DBI Holding LLC                                                                   |  | 08/02/2021 |  | Business Services                          |  |               | 6.25  | % |                                 |  | L+525   |             |  |  | 10,000,000 |  |  |                | 9,900,163  |  |  |   | 9,900,000  |  
|DCS Business Services, Inc.                                                       |  | 03/19/2018 |  | Business Services                          |  |               | 8.75  | % |                                 |  | L+725   |             |  |  | 2,237,139  |  |  |                | 2,225,615  |  |  |   | 2,237,139  |  
|DISA Global Solutions, Inc.                                                       |  | 12/09/2020 |  | Business Services                          |  |               | 5.50  | % |                                 |  | L+450   |             |  |  | 4,925,000  |  |  |                | 4,889,096  |  |  |   | 4,875,750  |  
|Douglas Products and Packaging Company LLC                                        |  | 06/30/2020 |  | Chemicals, Plastics and Rubber             |  |               | 5.75  | % |                                 |  | L+475   |             |  |  | 4,687,500  |  |  |                | 4,659,016  |  |  |   | 4,687,500  |  
|Driven Performance Brands, Inc. (8)                                               |  | 09/10/2020 |  | Consumer Goods: Durable                    |  |               | 5.75  | % |                                 |  | L+475   |             |  |  | 8,550,000  |  |  |                | 8,513,835  |  |  |   | 8,507,250  |  
|Driven Performance Brands, Inc. (Revolver) (8),
(10)                              |  | 09/10/2020 |  | Consumer Goods: Durable                    |  |               |      |   |                                 |  |        |             |  |  | 1,000,000  |  |  |                |           |  |  |   |           |  
|Education Networks of America, Inc.                                               |  | 05/06/2021 |  | Telecommunications                         |  |               | 8.00  | % |                                 |  | L+700   |             |  |  | 8,641,304  |  |  |                | 8,599,431  |  |  |   | 8,598,098  |  
|Education Networks of America, Inc. (Revolver)                                    |  | 05/06/2021 |  | Telecommunications                         |  |               | 8.00  | % |                                 |  | L+700   |             |  |  | 434,783    |  |  |                | 434,783    |  |  |   | 434,783    |  
|Education Networks of America, Inc. (Revolver)
(10)                               |  | 05/06/2021 |  | Telecommunications                         |  |               |      |   |                                 |  |        |             |  |  | 869,565    |  |  |                |           |  |  |   |           |  
|Efficient Collaborative Retail Marketing Company, LLC                             |  | 06/15/2022 |  | Media: Diversified and Production          |  |               | 7.75  | % |                                 |  | L+675   |             |  |  | 10,972,500 |  |  |                | 10,864,398 |  |  |   | 10,972,500 |  
|Emerging Markets Communications, LLC                                              |  | 07/01/2021 |  | Telecommunications                         |  |               | 6.75  | % |                                 |  | L+575   |             |  |  | 4,937,500  |  |  |                | 4,875,844  |  |  |   | 4,702,969  |  
|FHC Health Systems, Inc.                                                          |  | 12/23/2021 |  | Healthcare and Pharmaceuticals             |  |               | 5.00  | % |                                 |  | L+400   |             |  |  | 4,925,000  |  |  |                | 4,884,041  |  |  |   | 4,798,821  |  
|GlobalLogic Holdings, Inc.                                                        |  | 05/31/2019 |  | High Tech Industries                       |  |               | 6.25  | % |                                 |  | L+525   |             |  |  | 3,890,000  |  |  |                | 3,867,640  |  |  |   | 3,880,275  |  
|Greenway Health, LLC                                                              |  | 11/04/2020 |  | High Tech Industries                       |  |               | 6.00  | % |                                 |  | L+500   |             |  |  | 6,807,500  |  |  |                | 6,765,938  |  |  |   | 6,620,294  |  
|GTCR Valor Companies, Inc.                                                        |  | 06/16/2023 |  | Media: Broadcasting and Subscription       |  |               | 7.00  | % |                                 |  | L+600   |             |  |  | 7,481,250  |  |  |                | 7,191,975  |  |  |   | 7,116,539  |  
|Harbortouch Payments, LLC                                                         |  | 05/31/2022 |  | Banking, Finance, Insurance and RealEstate |  |               | 7.00  | % |                                 |  | L+600   |             |  |  | 6,956,250  |  |  |                | 6,889,369  |  |  |   | 7,025,812  |  
|Highline Aftermarket Acquisition, LLC (f/k/a DYK Prime Acquisition, LLC)          |  | 04/01/2022 |  | Wholesale                                  |  |               | 5.75  | % |                                 |  | L+475   |             |  |  | 7,312,500  |  |  |                | 7,244,146  |  |  |   | 7,275,937  |  
|Hollander Sleep Products, LLC                                                     |  | 10/21/2020 |  | Consumer Goods: Non-Durable                |  |               | 9.00  | % |                                 |  | L+800   |             |  |  | 1,165,886  |  |  |                | 1,153,016  |  |  |   | 1,142,569  |  
|Hostway Corporation                                                               |  | 12/13/2019 |  | High Tech Industries                       |  |               | 6.00  | % |                                 |  | L+475   |             |  |  | 2,624,730  |  |  |                | 2,610,592  |  |  |   | 2,183,890  |  
|Hunter Defense Technologies, Inc. (8)                                             |  | 08/05/2019 |  | Aerospace and Defense                      |  |               | 7.00  | % |                                 |  | L+600   |             |  |  | 6,256,250  |  |  |                | 6,218,559  |  |  |   | 5,505,500  |  
|Icynene U.S. Acquisition Corp. (6),
(11)                                          |  | 11/04/2020 |  | Construction and Building                  |  |               | 7.25  | % |                                 |  | L+625   |             |  |  | 6,225,820  |  |  |                | 6,133,990  |  |  |   | 6,225,820  |  
|Idera, Inc.                                                                       |  | 04/09/2021 |  | High Tech Industries                       |  |               | 6.50  | % |                                 |  | L+550   |             |  |  | 7,942,494  |  |  |                | 7,293,179  |  |  |   | 7,684,363  |  
|iEnergizer Limited and Aptara, Inc.(6),
(11)                                      |  | 05/01/2019 |  | Business Services                          |  |               | 7.25  | % |                                 |  | L+600   |             |  |  | 8,676,097  |  |  |                | 8,614,521  |  |  |   | 8,242,292  |  
|Imagine! Print Solutions, LLC                                                     |  | 03/30/2022 |  | Media: Advertising, Printing andPublishing |  |               | 7.00  | % |                                 |  | L+600   |             |  |  | 5,974,987  |  |  |                | 5,914,562  |  |  |   | 6,027,269  |  
|Instant Web, LLC, Term Loan A                                                     |  | 03/28/2019 |  | Media: Advertising, Printing andPublishing |  |               | 5.50  | % |                                 |  | L+450   |             |  |  | 5,277,938  |  |  |                | 5,235,239  |  |  |   | 5,277,938  |  
|Instant Web, LLC, Term Loan B                                                     |  | 03/28/2019 |  | Media: Advertising, Printing andPublishing |  |               | 12.00 | % |                                 |  | L+1,100 |             |  |  | 4,500,000  |  |  |                | 4,460,571  |  |  |   | 4,500,000  |  
|Interior Specialists, Inc.                                                        |  | 06/30/2020 |  | Construction and Building                  |  |               | 9.00  | % |                                 |  | L+800   |             |  |  | 6,662,719  |  |  |                | 6,609,864  |  |  |   | 6,662,719  |  
|Inventus Power, Inc. (f/k/a ICC-Nexergy, Inc.)                                    |  | 04/30/2020 |  | Consumer Goods: Durable                    |  |               | 6.50  | % |                                 |  | L+550   |             |  |  | 4,882,266  |  |  |                | 4,846,935  |  |  |   | 4,686,976  |  
|Jackson Hewitt Inc.                                                               |  | 07/30/2020 |  | Consumer Services                          |  |               | 8.00  | % |                                 |  | L+700   |             |  |  | 4,900,000  |  |  |                | 4,820,995  |  |  |   | 4,753,000  |  
|K2 Pure Solutions NoCal, L.P. (8)                                                 |  | 02/19/2021 |  | Chemicals, Plastics and Rubber             |  |               | 10.00 | % |                                 |  | L+900   |             |  |  | 4,002,471  |  |  |                | 3,932,760  |  |  |   | 3,925,841  |  
|Kendra Scott, LLC                                                                 |  | 07/17/2020 |  | Retail                                     |  |               | 7.00  | % |                                 |  | L+600   |             |  |  | 2,850,000  |  |  |                | 2,827,307  |  |  |   | 2,821,500  |  
|KHC Holdings, Inc.                                                                |  | 10/31/2022 |  | Wholesale                                  |  |               | 7.00  | % |                                 |  | L+600   |             |  |  | 12,406,250 |  |  |                | 12,210,683 |  |  |   | 12,344,219 |  
|KHC Holdings, Inc. (Revolver) (8),
(10)                                           |  | 10/30/2020 |  | Wholesale                                  |  |               |      |   |                                 |  |        |             |  |  | 1,209,677  |  |  |                |           |  |  |   |           |  
|Lago Resort & Casino, LLC                                                         |  | 03/07/2022 |  | Hotel, Gaming and Leisure                  |  |               | 10.50 | % |                                 |  | L+950   |             |  |  | 10,174,500 |  |  |                | 9,984,965  |  |  |   | 9,971,010  |  
|Lanyon Solutions, Inc.                                                            |  | 11/13/2020 |  | High Tech Industries                       |  |               | 5.50  | % |                                 |  | L+450   |             |  |  | 1,945,020  |  |  |                | 1,940,066  |  |  |   | 1,930,432  |  
|LifeCare Holdings LLC (8)                                                         |  | 11/30/2018 |  | Healthcare and Pharmaceuticals             |  |               | 6.50  | % |                                 |  | L+525   |             |  |  | 5,407,864  |  |  |                | 5,371,524  |  |  |   | 5,272,668  |  
|Lindblad Expeditions, Inc. (6), (11)                                              |  | 05/10/2021 |  | Hotel, Gaming and Leisure                  |  |               | 5.50  | % |                                 |  | L+450   |             |  |  | 2,186,607  |  |  |                | 2,177,539  |  |  |   | 2,186,607  |  
|Lindblad Maritime Enterprises, Ltd. (6),
(11)                                     |  | 05/10/2021 |  | Hotel, Gaming and Leisure                  |  |               | 5.50  | % |                                 |  | L+450   |             |  |  | 282,143    |  |  |                | 280,973    |  |  |   | 282,143    |  
|Lombart Brothers, Inc.                                                            |  | 04/13/2022 |  | Capital Equipment                          |  |               | 7.75  | % |                                 |  | L+675   |             |  |  | 5,985,000  |  |  |                | 5,901,046  |  |  |   | 6,014,925  |  
|Lombart Brothers, Inc. (Revolver) (8)                                             |  | 04/13/2022 |  | Capital Equipment                          |  |               | 7.75  | % |                                 |  | L+675   |             |  |  | 176,991    |  |  |                | 176,991    |  |  |   | 176,991    |  

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



50



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued)

SEPTEMBER 30, 2016



|                                                          |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|--------------------------------------------------------- |  | ---------- |  | ------------------------------------------ |  | ------------- | --------------- | ---- | ------------------------------- |  | ------- | ----------- |  |  | ---------- |  |  | -------------- | ----------- |  |  | - | ----------- | -
|Issuer Name                                               |  | Maturity   |  | Industry                                   |  | CurrentCoupon |                 |      | Basis PointSpreadAboveIndex (1) |  |         | Par /Shares |  |  | Cost       |  |  | Fair Value (2) |            
|Lombart Brothers, Inc. (Revolver) (8),
(10)               |  | 04/13/2022 |  | Capital Equipment                          |  |               |                |      |                                 |  |        |             |  |  | 1,061,947  |  |  | $              |            |  |  | $ |            |  
|Longs Drugs Incorporated                                 |  | 08/19/2021 |  | Healthcare and Pharmaceuticals             |  |               | 6.25            | %    |                                 |  | L+525   |             |  |  | 5,000,000  |  |  |                | 4,951,874   |  |  |   | 4,950,000   |  
|LSF9 Atlantis Holdings, LLC                               |  | 01/15/2021 |  | Retail                                     |  |               | 10.00           | %    |                                 |  | L+900   |             |  |  | 9,542,392  |  |  |                | 9,417,467   |  |  |   | 9,542,392   |  
|LTI Holdings, Inc.                                        |  | 04/18/2022 |  | Chemicals, Plastics and Rubber             |  |               | 5.25            | %    |                                 |  | L+425   |             |  |  | 5,431,250  |  |  |                | 4,973,326   |  |  |   | 5,254,734   |  
|Marketplace Events LLC                                    |  | 01/27/2021 |  | Media: Diversified and Production          |  |               | 6.25            | %    |                                 |  | L+525   |             |  |  | 1,362,530  |  |  |                | 1,342,162   |  |  |   | 1,342,092   |  
|Marketplace Events LLC (12)                               |  | 01/27/2021 |  | Media: Diversified and Production          |  |               | 6.25            | %    |                                 |  | P+275   |             |  |  | 17,244,188 |  |  |                | 12,065,652  |  |  |   | 13,078,215  |  
|Marketplace Events LLC (Revolver) (8)                     |  | 01/27/2021 |  | Media: Diversified and Production          |  |               | 6.25            | %    |                                 |  | P+275   |             |  |  | 1,090,024  |  |  |                | 1,090,024   |  |  |   | 1,090,024   |  
|Marketplace Events LLC (Revolver) (8),
(10)               |  | 01/27/2021 |  | Media: Diversified and Production          |  |               |                |      |                                 |  |        |             |  |  | 613,139    |  |  |                |            |  |  |   |            |  
|Mission Critical Electronics, Inc.
(8)                    |  | 09/28/2022 |  | Capital Equipment                          |  |               | 6.00            | %    |                                 |  | L+500   |             |  |  | 4,116,608  |  |  |                | 4,075,499   |  |  |   | 4,075,442   |  
|Mission Critical Electronics, Inc. (Revolver) (8),
(10)   |  | 09/28/2021 |  | Capital Equipment                          |  |               |                |      |                                 |  |        |             |  |  | 883,392    |  |  |                |            |  |  |   |            |  
|New Trident HoldCorp, Inc.                                |  | 07/31/2019 |  | Healthcare and Pharmaceuticals             |  |               | 6.50            | %    |                                 |  | L+525   |             |  |  | 8,817,647  |  |  |                | 8,767,669   |  |  |   | 8,288,588   |  
|Pathway Partners Vet Management Company LLC
(8)           |  | 08/19/2022 |  | Healthcare and Pharmaceuticals             |  |               | 6.00            | %    |                                 |  | L+500   |             |  |  | 6,268,657  |  |  |                | 6,205,970   |  |  |   | 6,205,970   |  
|Pathway Partners Vet Management Company LLC (8),
(10)     |  | 08/19/2022 |  | Healthcare and Pharmaceuticals             |  |               |                |      |                                 |  |        |             |  |  | 3,731,343  |  |  |                |            |  |  |   |            |  
|Polycom, Inc.                                             |  | 09/27/2023 |  | Telecommunications                         |  |               | 7.50            | %    |                                 |  | L+650   |             |  |  | 6,000,000  |  |  |                | 5,760,000   |  |  |   | 5,775,000   |  
|Precyse Acquisition Corp.                                 |  | 10/20/2022 |  | Healthcare and Pharmaceuticals             |  |               | 6.50            | %    |                                 |  | L+550   |             |  |  | 3,990,000  |  |  |                | 3,932,956   |  |  |   | 4,014,938   |  
|Premier Dental Services, Inc.                             |  | 11/01/2018 |  | Consumer Services                          |  |               | 7.50            | %    |                                 |  | L+650   |             |  |  | 7,528,230  |  |  |                | 7,473,587   |  |  |   | 7,490,588   |  
|Profile Products LLC                                      |  | 05/20/2021 |  | Environmental Industries                   |  |               | 5.75            | %    |                                 |  | L+475   |             |  |  | 7,281,762  |  |  |                | 7,222,561   |  |  |   | 7,281,762   |  
|Profile Products LLC (Revolver) (8),
(10)                 |  | 05/20/2020 |  | Environmental Industries                   |  |               |                |      |                                 |  |        |             |  |  | 2,459,016  |  |  |                |            |  |  |   |            |  
|Quick Weight Loss Centers, LLC                            |  | 08/23/2021 |  | Beverage, Food and Tobacco                 |  |               | 5.75            | %    |                                 |  | L+475   |             |  |  | 10,000,000 |  |  |                | 9,852,456   |  |  |   | 9,900,000   |  
|Research Now Group, Inc.                                  |  | 03/18/2021 |  | High Tech Industries                       |  |               | 5.50            | %    |                                 |  | L+450   |             |  |  | 6,895,000  |  |  |                | 6,867,800   |  |  |   | 6,688,150   |  
|Robertshaw US Holding Corp.                               |  | 06/18/2019 |  | Consumer Goods: Durable                    |  |               | 8.50            | %    |                                 |  | L+700   |             |  |  | 4,252,830  |  |  |                | 4,233,671   |  |  |   | 4,258,699   |  
|Ryan, LLC                                                 |  | 08/07/2020 |  | Business Services                          |  |               | 6.75            | %    |                                 |  | L+575   |             |  |  | 4,218,750  |  |  |                | 4,166,413   |  |  |   | 4,163,400   |  
|Sensus USA, Inc.                                          |  | 04/05/2023 |  | Utilities: Water                           |  |               | 6.50            | %    |                                 |  | L+550   |             |  |  | 9,975,000  |  |  |                | 9,692,511   |  |  |   | 9,999,938   |  
|Snak Club, LLC                                            |  | 07/19/2021 |  | Beverage, Food and Tobacco                 |  |               | 6.00            | %    |                                 |  | L+500   |             |  |  | 4,968,748  |  |  |                | 4,896,623   |  |  |   | 4,919,060   |  
|Snak Club, LLC (Revolver) (10)                            |  | 07/19/2021 |  | Beverage, Food and Tobacco                 |  |               |                |      |                                 |  |        |             |  |  | 500,000    |  |  |                |            |  |  |   |            |  
|Software Paradigms International Group, LLC               |  | 05/21/2021 |  | High Tech Industries                       |  |               | 6.50            | %    |                                 |  | L+550   |             |  |  | 9,875,000  |  |  |                | 9,781,596   |  |  |   | 9,825,625   |  
|Sotera Defense Solutions, Inc.                            |  | 04/21/2017 |  | Aerospace and Defense                      |  |               | 9.00            | %    |                                 |  | L+750   |             |  |  | 5,668,843  |  |  |                | 5,614,696   |  |  |   | 5,640,499   |  
|Sundial Group Holdings LLC                                |  | 10/19/2021 |  | Consumer Goods: Non-Durable                |  |               | 7.25            | %    |                                 |  | L+625   |             |  |  | 7,312,500  |  |  |                | 7,200,786   |  |  |   | 7,312,500   |  
|Survey Sampling International, LLC                        |  | 12/16/2020 |  | Business Services                          |  |               | 6.00            | %    |                                 |  | L+500   |             |  |  | 7,446,562  |  |  |                | 7,395,200   |  |  |   | 7,409,329   |  
|Systems Maintenance Services Holding, Inc.                |  | 10/18/2019 |  | High Tech Industries                       |  |               | 5.00            | %    |                                 |  | L+400   |             |  |  | 5,850,000  |  |  |                | 5,834,217   |  |  |   | 5,733,000   |  
|Tensar Corporation                                        |  | 07/09/2021 |  | Construction and Building                  |  |               | 5.75            | %    |                                 |  | L+475   |             |  |  | 4,822,723  |  |  |                | 4,786,985   |  |  |   | 4,071,198   |  
|The Original Cakerie, Co. (6), (11)                       |  | 07/20/2021 |  | Consumer Goods: Non-Durable                |  |               | 6.50            | %    |                                 |  | L+550   |             |  |  | 3,092,295  |  |  |                | 3,062,366   |  |  |   | 3,061,372   |  
|The Original Cakerie Ltd. (6), (11)                       |  | 07/20/2021 |  | Consumer Goods: Non-Durable                |  |               | 6.00            | %    |                                 |  | L+500   |             |  |  | 5,986,002  |  |  |                | 5,928,120   |  |  |   | 5,926,142   |  
|The Original Cakerie Ltd. (Revolver) (6), (8), (10),
(11) |  | 07/20/2021 |  | Consumer Goods: Non-Durable                |  |               |                |      |                                 |  |        |             |  |  | 1,418,484  |  |  |                |            |  |  |   | (7,092      | )
|TOMS Shoes, LLC                                           |  | 11/02/2020 |  | Consumer Goods: Non-Durable                |  |               | 6.50            | %    |                                 |  | L+550   |             |  |  | 1,970,000  |  |  |                | 1,825,559   |  |  |   | 1,576,000   |  
|Triad Manufacturing, Inc.                                 |  | 12/28/2020 |  | Capital Equipment                          |  |               | 11.27           | %    |                                 |  | L+1,075 | (9)         |  |  | 10,306,936 |  |  |                | 10,124,477  |  |  |   | 10,306,936  |  
|UniTek Global Services, Inc. (8)                          |  | 01/14/2019 |  | Telecommunications                         |  |               | 9.50(PIK 1.00   | % %) |                                 |  | L+850   |             |  |  | 256,971    |  |  |                | 256,971     |  |  |   | 256,971     |  
|UniTek Global Services, Inc. (8)                          |  | 01/14/2019 |  | Telecommunications                         |  |               | 8.50            | %    |                                 |  | L+750   |             |  |  | 599,702    |  |  |                | 562,432     |  |  |   | 590,706     |  
|UniTek Global Services, Inc. (8),
(10)                    |  | 01/14/2019 |  | Telecommunications                         |  |               |                |      |                                 |  |        |             |  |  | 151,090    |  |  |                |            |  |  |   |            |  
|Universal Fiber Systems, LLC                              |  | 10/04/2021 |  | Chemicals, Plastics and Rubber             |  |               | 6.50            | %    |                                 |  | L+550   |             |  |  | 4,962,500  |  |  |                | 4,919,423   |  |  |   | 4,937,688   |  
|U.S. Anesthesia Partners, Inc.                            |  | 12/31/2019 |  | Healthcare and Pharmaceuticals             |  |               | 6.00            | %    |                                 |  | L+500   |             |  |  | 9,900,000  |  |  |                | 9,818,407   |  |  |   | 9,850,500   |  
|US Med Acquisition, Inc. (8)                              |  | 08/13/2021 |  | Healthcare and Pharmaceuticals             |  |               | 10.00           | %    |                                 |  | L+900   |             |  |  | 3,089,844  |  |  |                | 3,089,844   |  |  |   | 3,089,844   |  
|Vistage Worldwide, Inc.                                   |  | 08/19/2021 |  | Media: Broadcasting and Subscription       |  |               | 6.50            | %    |                                 |  | L+550   |             |  |  | 4,792,831  |  |  |                | 4,752,002   |  |  |   | 4,792,831   |  
|Winchester Electronics Corporation                        |  | 06/30/2022 |  | Capital Equipment                          |  |               | 7.50            | %    |                                 |  | L+650   |             |  |  | 7,773,579  |  |  |                | 7,703,094   |  |  |   | 7,668,171   |  
|Winchester Electronics Corporation
(10)                   |  | 06/30/2022 |  | Capital Equipment                          |  |               |                |      |                                 |  |        |             |  |  | 708,333    |  |  |                |            |  |  |   | (9,605      | )
|Worley Claims Services, LLC                               |  | 10/30/2020 |  | Banking, Finance, Insurance and RealEstate |  |               | 9.00            | %    |                                 |  | L+800   |             |  |  | 7,316,440  |  |  |                | 7,259,010   |  |  |   | 7,316,440   |  
|                                                          |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|Total First Lien Secured Debt                             |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                | 549,736,982 |  |  |   | 548,410,095 |  
|                                                          |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|Second Lien Secured Debt9.7%                             |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|Affinion Group, Inc. (8)                                  |  | 10/31/2018 |  | Consumer Goods: Durable                    |  |               | 8.50            | %    |                                 |  | L+700   |             |  |  | 1,000,000  |  |  |                | 942,276     |  |  |   | 879,170     |  
|American Gilsonite Company(5), (8)                        |  | 09/01/2017 |  | Metals and Mining                          |  |               |                | (7)  |                                 |  |        |             |  |  | 1,000,000  |  |  |                | 1,000,000   |  |  |   | 700,000     |  
|Douglas Products and Packaging Company LLC                |  | 12/31/2020 |  | Chemicals, Plastics and Rubber             |  |               | 11.34           | %    |                                 |  | L+1,050 | (9)         |  |  | 2,000,000  |  |  |                | 1,971,030   |  |  |   | 2,020,000   |  
|Howard Berger Co. LLC                                     |  | 09/30/2020 |  | Wholesale                                  |  |               | 11.00           | %    |                                 |  | L+1,000 |             |  |  | 11,000,000 |  |  |                | 10,511,818  |  |  |   | 9,900,000   |  
|MailSouth, Inc.                                           |  | 10/22/2021 |  | Media: Advertising, Printing andPublishing |  |               | 11.50           | %    |                                 |  | L+1,050 |             |  |  | 3,775,000  |  |  |                | 3,703,724   |  |  |   | 3,775,000   |  
|Novitex Acquisition, LLC                                  |  | 07/07/2021 |  | Business Services                          |  |               | 12.25           | %    |                                 |  | L+1,100 |             |  |  | 11,000,000 |  |  |                | 10,914,618  |  |  |   | 11,000,000  |  
|Penton Media, Inc. (8)                                    |  | 10/02/2020 |  | Media: Diversified and Production          |  |               | 9.00            | %    |                                 |  | L+775   |             |  |  | 4,872,042  |  |  |                | 4,826,926   |  |  |   | 4,853,772   |  
|Sunshine Oilsands Ltd. (5), (6), (8),
(11)                |  | 08/01/2017 |  | Energy: Oil and Gas                        |  |               | 12.50           | %    |                                 |  |        |             |  |  | 2,812,500  |  |  |                | 2,756,732   |  |  |   | 1,631,250   |  
|VT Buyer Acquisition Corp.                                |  | 01/30/2023 |  | Business Services                          |  |               | 10.75           | %    |                                 |  | L+975   |             |  |  | 1,837,500  |  |  |                | 1,777,304   |  |  |   | 1,837,500   |  
|                                                          |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|Total Second Lien Secured Debt                            |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                | 38,404,428  |  |  |   | 36,596,692  |  
|                                                          |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|Subordinated Debt/Corporate Notes0.8%
(8)                |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|Affinion International Holdings Limited (5), (6),
(11)    |  | 07/30/2018 |  | Consumer Goods: Durable                    |  |               | 7.50(PIK 4.00   | % %) |                                 |  |        |             |  |  | 1,135,273  |  |  |                | 1,030,320   |  |  |   | 1,035,937   |  
|Credit Infonet, Inc.                                      |  | 10/26/2018 |  | High Tech Industries                       |  |               | 13.00(PIK 1.75  | % %) |                                 |  |        |             |  |  | 2,069,078  |  |  |                | 2,050,767   |  |  |   | 1,975,969   |  
|UniTek Global Services, Inc.                              |  | 07/15/2019 |  | Telecommunications                         |  |               | 15.00(PIK 15.00 | % %) |                                 |  |        |             |  |  | 146,996    |  |  |                | 146,996     |  |  |   | 148,466     |  
|                                                          |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|Total Subordinated Debt/Corporate Notes                   |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                | 3,228,083   |  |  |   | 3,160,372   |  
|                                                          |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|Preferred Equity0.4%(7),
(8)                             |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|UniTek Global Services, Inc.                              |  |           |  | Telecommunications                         |  |               | 13.50           | %    |                                 |  |        |             |  |  | 1,047,317  |  |  |                | 670,283     |  |  |   | 1,319,308   |  
|                                                          |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|Common Equity/Warrants2.5% (7),
(8)                      |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |            |  |  |                |             |  |  |   |             |  
|Affinion Group Holdings, Inc.                             |  |           |  | Consumer Goods: Durable                    |  |               |                |      |                                 |  |        |             |  |  | 99,029     |  |  |                | 3,514,572   |  |  |   | 3,700,216   |  





SEE NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



51



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued)

SEPTEMBER 30, 2016



|                                                                         |  |          |   |              |          |  |                                            |               |  |  |                                 |  |  |             |   |  |      |  |         |                |  |   |           |  |  |   |           | 
|------------------------------------------------------------------------ |  | -------- | - | ------------ | -------- |  | ------------------------------------------ | ------------- |  |  | ------------------------------- |  |  | ----------- | - |  | ---- |  | ------- | -------------- |  | - | --------- |  |  | - | --------- | 
|Issuer Name                                                              |  | Maturity |   |              | Industry |  |                                            | CurrentCoupon |  |  | Basis PointSpreadAboveIndex (1) |  |  | Par /Shares |   |  | Cost |  |         | Fair Value (2) | 
|Affinion Group Holdings, Inc., Series C and Series D                     |  |          |  |              |          |  | Consumer Goods: Durable                    |               |  |  |                                |  |  |             |  |  |      |  | 4,298   |                |  | $ | 1,186,649 |  |  | $ | 20,096    | 
|Corfin InvestCo, L.P.                                                    |  |          |  |              |          |  | Aerospace and Defense                      |               |  |  |                                |  |  |             |  |  |      |  | 3,000   |                |  |   | 300,000   |  |  |   | 621,550   | 
|Corfin InvestCo, L.P. (10)                                               |  |          |  |              |          |  | Aerospace and Defense                      |               |  |  |                                |  |  |             |  |  |      |  | 3,000   |                |  |   |          |  |  |   |          | 
|e.l.f. Beauty, Inc. (f/k/a J.A. Cosmetics US, Inc.)                      |  |          |  |              |          |  | Consumer Goods: Durable                    |               |  |  |                                |  |  |             |  |  |      |  | 110,399 |                |  |   | 295,670   |  |  |   | 2,957,767 | 
|Faraday Holdings, LLC (Interior Specialists, Inc.)                       |  |          |  |              |          |  | Construction and Building                  |               |  |  |                                |  |  |             |  |  |      |  | 1,141   |                |  |   | 58,044    |  |  |   | 94,560    | 
|Patriot National, Inc.                                                   |  |          |  |              |          |  | Banking, Finance, Insurance and RealEstate |               |  |  |                                |  |  |             |  |  |      |  | 11,867  |                |  |   | 27,995    |  |  |   | 106,922   | 
|TPC Broadband Investors, LP(Advanced Cable Communications, LLC)          |  |          |  |              |          |  | Telecommunications                         |               |  |  |                                |  |  |             |  |  |      |  | 430,666 |                |  |   | 430,666   |  |  |   | 430,666   | 
|TPC Broadband Investors, LP(Advanced Cable Communications, LLC)(10)      |  |          |  |              |          |  | Telecommunications                         |               |  |  |                                |  |  |             |  |  |      |  | 569,334 |                |  |   |          |  |  |   |          | 
|UniTek Global Services, Inc.                                             |  |          |  |              |          |  | Telecommunications                         |               |  |  |                                |  |  |             |  |  |      |  | 149,617 |                |  |   |          |  |  |   | 892,276   | 
|Vestcom Parent Holdings, Inc.                                            |  |          |  |              |          |  | Media: Advertising, Printing andPublishing |               |  |  |                                |  |  |             |  |  |      |  | 15,179  |                |  |   | 56,895    |  |  |   | 577,005   | 
|                                                                         |  |          |   |              |          |  |                                            |               |  |  |                                 |  |  |             |   |  |      |  |         |                |  |   |           |  |  |   |           | 
|Total Common Equity/Warrants                                             |  |          |   | 5,870,491    |          |  |                                            | 9,401,058     | 
|                                                                         |  |          |   |              |          |  |                                            |               |  |  |                                 |  |  |             |   |  |      |  |         |                |  |   |           |  |  |   |           | 
|Total Investments in Non-Controlled, Non-Affiliated Portfolio
Companies  |  |          |   | 597,910,267  |          |  |                                            | 598,887,525   | 
|                                                                         |  |          |   |              |          |  |                                            |               |  |  |                                 |  |  |             |   |  |      |  |         |                |  |   |           |  |  |   |           | 
|Cash and Cash Equivalents7.7%                                           |  |          |   |              |          |  |                                            |               |  |  |                                 |  |  |             |   |  |      |  |         |                |  |   |           |  |  |   |           | 
|BlackRock Liquidity Funds, Temp Cash and Temp Fund, Institutional Shares |  |          |   | 28,212,041   |          |  |                                            | 28,212,041    | 
|BNY Mellon Cash Reserve and Cash                                         |  |          |   | 691,318      |          |  |                                            | 698,932       | 
|                                                                         |  |          |   |              |          |  |                                            |               |  |  |                                 |  |  |             |   |  |      |  |         |                |  |   |           |  |  |   |           | 
|Total Cash and Cash Equivalents                                          |  |          |   | 28,903,359   |          |  |                                            | 28,910,973    | 
|                                                                         |  |          |   |              |          |  |                                            |               |  |  |                                 |  |  |             |   |  |      |  |         |                |  |   |           |  |  |   |           | 
|Total Investments and Cash Equivalents167.0%                            |  |          | $ | 626,813,626  |          |  | $                                          | 627,798,498   | 
|                                                                         |  |          |   |              |          |  |                                            |               |  |  |                                 |  |  |             |   |  |      |  |         |                |  |   |           |  |  |   |           | 
|Liabilities in Excess of Other Assets(67.0)%                            |  |          |   | (251,891,670 | )       
|Net Assets100.0%                                                        |  |          | $ | 375,906,828  |         
|                                                                         |  |          |   |              |          |  |                                            |               |  |  |                                 |  |  |             |   |  |      |  |         |                |  |   |           |  |  |   |           | 



|(1) | Represents floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the applicable London Interbank Offered Rate, or LIBOR or L, or Prime rate, or
P. All securities are subject to a LIBOR or Prime rate floor where a spread is provided, unless noted. The spread provided includes payment-in-kind, or PIK, interest and other fee rates, if any.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Valued based on our accounting policy (see Note 2).
|--- | ---------------------------------------------------

|(3) | The provisions of the 1940 Act classify investments based on the level of control that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is generally presumed to be
non-controlled when we own 25% or less of the portfolio companys voting securities and controlled when we own more than 25% of the portfolio companys voting securities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The provisions of the 1940 Act classify investments further based on the level of ownership that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is generally deemed as
non-affiliated when we own less than 5% of a portfolio companys voting securities and affiliated when we own 5% or more of a portfolio companys voting securities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Security is exempt from registration under Rule 144A promulgated under the Securities Act of 1933, as amended, or the Securities Act. The security may be resold in transactions that are exempt from registration,
normally to qualified institutional buyers.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Non-U.S. company or principal place of business outside the United States.
|--- | --------------------------------------------------------------------------

|(7) | Non-income producing securities.
|--- | --------------------------------

|(8) | The securities, or a portion thereof, are not pledged as collateral under the Credit Facility. All other securities are pledged as collateral under the Credit Facility and held through Funding I.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Coupon is not subject to a LIBOR or Prime rate floor.
|--- | -----------------------------------------------------

|(10) | Represents the purchase of a security with delayed settlement or a revolving line of credit that is currently an unfunded investment. This security does not earn a basis point spread above an index while it is unfunded.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | The investment is treated as a non-qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying
assets represent at least 70% of our total assets.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Par amount is denominated in Canadian Dollars.
|---- | ----------------------------------------------

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



52



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2015



|                                                                                  |  |          |            |  |          |                                            |               |  |               |                                 |  |  |             |     |  |      |            |  |                |   |            |  |  |   |            | 
|--------------------------------------------------------------------------------- |  | -------- | ---------- |  | -------- | ------------------------------------------ | ------------- |  | ------------- | ------------------------------- |  |  | ----------- | --- |  | ---- | ---------- |  | -------------- | - | ---------- |  |  | - | ---------- | 
|Issuer Name                                                                       |  | Maturity |            |  | Industry |                                            | CurrentCoupon |  |               | Basis PointSpreadAboveIndex (1) |  |  | Par /Shares |     |  | Cost |            |  | Fair Value (2) |  
|Investments in Non-Controlled, Non-Affiliated Portfolio Companies104.2% (3), (4) | 
|First Lien Secured Debt89.1%                                                     |  |          |            |  |          |                                            |               |  |               |                                 |  |  |             |     |  |      |            |  |               
|AKA Diversified Holdings, Inc.                                                    |  |          | 04/02/2018 |  |          | Retail                                     |               |  | 11.97         | %                               |  |  | L+1,175     | (9) |  |      | 10,734,388 |  |                | $ | 10,555,953 |  |  | $ | 10,895,404 | 
|AKA Diversified Holdings, Inc. (Revolver)
(10)                                    |  |          | 04/02/2018 |  |          | Retail                                     |               |  |              |                                 |  |  |            |     |  |      | 1,165,725  |  |                |   |           |  |  |   | 17,486     | 
|ALG USA Holdings, LLC                                                             |  |          | 02/28/2019 |  |          | Hotel, Gaming and Leisure                  |               |  | 7.00          | %                               |  |  | L+575       |     |  |      | 7,136,577  |  |                |   | 7,101,328  |  |  |   | 7,118,736  | 
|Alvogen Pharma US, Inc. (6), (11)                                                 |  |          | 04/04/2022 |  |          | Healthcare and Pharmaceuticals             |               |  | 6.00          | %                               |  |  | L+500       |     |  |      | 3,900,038  |  |                |   | 3,881,182  |  |  |   | 3,880,538  | 
|Ancile Solutions, Inc.                                                            |  |          | 07/16/2018 |  |          | High Tech Industries                       |               |  | 6.25          | %                               |  |  | L+500       |     |  |      | 2,990,287  |  |                |   | 2,971,513  |  |  |   | 2,975,336  | 
|AP Gaming I, LLC                                                                  |  |          | 12/21/2020 |  |          | Hotel, Gaming and Leisure                  |               |  | 9.25          | %                               |  |  | L+825       |     |  |      | 6,602,074  |  |                |   | 6,517,717  |  |  |   | 6,492,018  | 
|ARC Automotive Group, Inc.                                                        |  |          | 10/12/2020 |  |          | Automotive                                 |               |  | 6.00          | %                               |  |  | L+500       |     |  |      | 3,970,000  |  |                |   | 3,935,708  |  |  |   | 3,930,300  | 
|Azure Midstream Energy LLC                                                        |  |          | 11/15/2018 |  |          | Energy: Oil and Gas                        |               |  | 7.50          | %                               |  |  | L+650       |     |  |      | 5,310,750  |  |                |   | 5,189,661  |  |  |   | 4,514,138  | 
|Blue Bird Body Company                                                            |  |          | 06/29/2020 |  |          | Automotive                                 |               |  | 6.50          | %                               |  |  | L+550       |     |  |      | 4,280,585  |  |                |   | 4,227,278  |  |  |   | 4,264,533  | 
|Bowlmor AMF Corp.                                                                 |  |          | 09/17/2021 |  |          | Retail                                     |               |  | 7.25          | %                               |  |  | L+625       |     |  |      | 12,902,393 |  |                |   | 12,820,758 |  |  |   | 12,805,625 | 
|Camin Cargo Control, Inc.                                                         |  |          | 06/30/2021 |  |          | Transportation: Cargo                      |               |  | 5.75          | %                               |  |  | L+475       |     |  |      | 2,493,750  |  |                |   | 2,469,351  |  |  |   | 2,468,812  | 
|CareCentrix, Inc.                                                                 |  |          | 07/08/2021 |  |          | Healthcare and Pharmaceuticals             |               |  | 6.00          | %                               |  |  | L+500       |     |  |      | 5,000,000  |  |                |   | 4,878,103  |  |  |   | 4,870,850  | 
|CBAC Borrower, LLC (8)                                                            |  |          | 07/02/2020 |  |          | Hotel, Gaming and Leisure                  |               |  | 8.25          | %                               |  |  | L+700       |     |  |      | 5,000,000  |  |                |   | 4,961,991  |  |  |   | 4,700,000  | 
|Charming Charlie LLC                                                              |  |          | 12/24/2019 |  |          | Retail                                     |               |  | 9.00          | %                               |  |  | L+800       |     |  |      | 4,432,500  |  |                |   | 4,381,480  |  |  |   | 4,210,875  | 
|Chicken Soup for the Soul Publishing, LLC                                         |  |          | 01/08/2019 |  |          | Media: Advertising, Printing andPublishing |               |  | 7.25          | %                               |  |  | L+600       |     |  |      | 4,925,000  |  |                |   | 4,887,389  |  |  |   | 4,925,000  | 
|CRGT Inc.                                                                         |  |          | 12/21/2020 |  |          | High Tech Industries                       |               |  | 7.50          | %                               |  |  | L+650       |     |  |      | 11,861,946 |  |                |   | 11,755,521 |  |  |   | 11,743,327 | 
|Curo Health Services Holdings, Inc.                                               |  |          | 02/07/2022 |  |          | Healthcare and Pharmaceuticals             |               |  | 6.50          | %                               |  |  | L+550       |     |  |      | 1,990,000  |  |                |   | 1,971,403  |  |  |   | 1,988,348  | 
|DCS Business Services, Inc.                                                       |  |          | 03/19/2018 |  |          | Business Services                          |               |  | 7.25          | %                               |  |  | L+575       |     |  |      | 2,976,683  |  |                |   | 2,952,648  |  |  |   | 3,017,613  | 
|DISA Global Solutions, Inc.                                                       |  |          | 12/09/2020 |  |          | Business Services                          |               |  | 5.50          | %                               |  |  | L+450       |     |  |      | 4,975,000  |  |                |   | 4,931,287  |  |  |   | 4,875,500  | 
|Douglas Products and Packaging Company LLC                                        |  |          | 06/30/2020 |  |          | Chemicals, Plastics and Rubber             |               |  | 5.75          | %                               |  |  | L+475       |     |  |      | 4,937,500  |  |                |   | 4,901,367  |  |  |   | 4,937,500  | 
|Driven Performance Brands, Inc. (8)                                               |  |          | 09/10/2020 |  |          | Consumer Goods: Durable                    |               |  | 5.75          | %                               |  |  | L+475       |     |  |      | 9,000,000  |  |                |   | 8,955,000  |  |  |   | 8,955,000  | 
|Driven Performance Brands, Inc. (Revolver) (8),
(10)                              |  |          | 09/10/2020 |  |          | Consumer Goods: Durable                    |               |  |              |                                 |  |  |            |     |  |      | 1,000,000  |  |                |   |           |  |  |   |           | 
|Emerging Markets Communications, LLC                                              |  |          | 07/01/2021 |  |          | Telecommunications                         |               |  | 6.75          | %                               |  |  | L+575       |     |  |      | 4,987,500  |  |                |   | 4,914,374  |  |  |   | 4,862,812  | 
|FHC Health Systems, Inc.                                                          |  |          | 12/23/2021 |  |          | Healthcare and Pharmaceuticals             |               |  | 5.00          | %                               |  |  | L+400       |     |  |      | 4,975,000  |  |                |   | 4,927,105  |  |  |   | 4,897,290  | 
|GlobalLogic Holdings, Inc.                                                        |  |          | 05/31/2019 |  |          | High Tech Industries                       |               |  | 6.25          | %                               |  |  | L+525       |     |  |      | 3,930,000  |  |                |   | 3,900,641  |  |  |   | 3,910,350  | 
|Granite Broadcasting Corporation                                                  |  |          | 05/23/2018 |  |          | Media: Broadcasting andSubscription        |               |  | 6.75          | %                               |  |  | L+550       |     |  |      | 1,091,582  |  |                |   | 1,090,547  |  |  |   | 1,088,177  | 
|Greenway Health, LLC                                                              |  |          | 11/04/2020 |  |          | High Tech Industries                       |               |  | 6.00          | %                               |  |  | L+500       |     |  |      | 6,877,500  |  |                |   | 6,827,661  |  |  |   | 6,739,950  | 
|Help/Systems Holdings, Inc.                                                       |  |          | 06/28/2019 |  |          | High Tech Industries                       |               |  | 5.50          | %                               |  |  | L+450       |     |  |      | 4,900,000  |  |                |   | 4,866,257  |  |  |   | 4,851,000  | 
|Hollander Sleep Products, LLC                                                     |  |          | 10/21/2020 |  |          | Consumer Goods: Non-Durable                |               |  | 9.00          | %                               |  |  | L+800       |     |  |      | 1,194,000  |  |                |   | 1,178,322  |  |  |   | 1,194,000  | 
|Hostway Corporation                                                               |  |          | 12/13/2019 |  |          | High Tech Industries                       |               |  | 6.00          | %                               |  |  | L+475       |     |  |      | 2,753,737  |  |                |   | 2,734,900  |  |  |   | 2,726,199  | 
|Hunter Defense Technologies, Inc.                                                 |  |          | 08/05/2019 |  |          | Aerospace and Defense                      |               |  | 6.50          | %                               |  |  | L+550       |     |  |      | 6,650,000  |  |                |   | 6,598,073  |  |  |   | 6,641,687  | 
|ICC-Nexergy, Inc.                                                                 |  |          | 04/30/2020 |  |          | Consumer Goods: Durable                    |               |  | 6.50          | %                               |  |  | L+550       |     |  |      | 4,987,500  |  |                |   | 4,941,329  |  |  |   | 4,937,625  | 
|Icynene U.S. Acquisition Corp. (6),
(11)                                          |  |          | 11/04/2020 |  |          | Construction and Building                  |               |  | 7.25          | %                               |  |  | L+625       |     |  |      | 6,965,000  |  |                |   | 6,842,099  |  |  |   | 6,965,000  | 
|iEnergizer Limited and Aptara, Inc.(6),
(11)                                      |  |          | 05/01/2019 |  |          | Business Services                          |               |  | 7.25          | %                               |  |  | L+600       |     |  |      | 10,094,315 |  |                |   | 10,001,190 |  |  |   | 9,084,884  | 
|Instant Web, LLC, Term Loan A                                                     |  |          | 03/28/2019 |  |          | Media: Advertising, Printing andPublishing |               |  | 5.50          | %                               |  |  | L+450       |     |  |      | 5,366,227  |  |                |   | 5,306,494  |  |  |   | 5,366,227  | 
|Instant Web, LLC, Term Loan B                                                     |  |          | 03/28/2019 |  |          | Media: Advertising, Printing andPublishing |               |  | 12.00         | %                               |  |  | L+1,100     |     |  |      | 4,500,000  |  |                |   | 4,447,058  |  |  |   | 4,500,000  | 
|Interior Specialists, Inc.                                                        |  |          | 06/30/2020 |  |          | Construction and Building                  |               |  | 9.00          | %                               |  |  | L+800       |     |  |      | 6,800,000  |  |                |   | 6,734,452  |  |  |   | 6,800,000  | 
|Jackson Hewitt Tax Service Inc.                                                   |  |          | 07/30/2020 |  |          | Consumer Services                          |               |  | 8.00          | %                               |  |  | L+700       |     |  |      | 5,000,000  |  |                |   | 4,901,996  |  |  |   | 4,900,000  | 
|K2 Pure Solutions NoCal, L.P. (8)                                                 |  |          | 08/19/2019 |  |          | Chemicals, Plastics and Rubber             |               |  | 11.00         | %                               |  |  | L+1,000     |     |  |      | 5,965,222  |  |                |   | 5,874,403  |  |  |   | 5,537,227  | 
|Kendra Scott, LLC                                                                 |  |          | 07/17/2020 |  |          | Retail                                     |               |  | 7.00          | %                               |  |  | L+600       |     |  |      | 3,000,000  |  |                |   | 2,970,849  |  |  |   | 2,977,500  | 
|Lanyon Solutions, Inc.                                                            |  |          | 11/13/2020 |  |          | High Tech Industries                       |               |  | 5.50          | %                               |  |  | L+450       |     |  |      | 1,965,012  |  |                |   | 1,958,874  |  |  |   | 1,943,731  | 
|LifeCare Holdings LLC (8)                                                         |  |          | 11/30/2018 |  |          | Healthcare and Pharmaceuticals             |               |  | 6.50          | %                               |  |  | L+525       |     |  |      | 5,789,068  |  |                |   | 5,735,375  |  |  |   | 5,736,619  | 
|Lindblad Expeditions, Inc. (11)                                                   |  |          | 05/10/2021 |  |          | Hotel, Gaming and Leisure                  |               |  | 5.50          | %                               |  |  | L+450       |     |  |      | 2,208,750  |  |                |   | 2,197,809  |  |  |   | 2,197,706  | 
|Lindblad Maritime Enterprises, Ltd. (6),
(11)                                     |  |          | 05/10/2021 |  |          | Hotel, Gaming and Leisure                  |               |  | 5.50          | %                               |  |  | L+450       |     |  |      | 285,000    |  |                |   | 283,588    |  |  |   | 283,575    | 
|LTI Holdings, Inc.                                                                |  |          | 04/18/2022 |  |          | Chemicals, Plastics and Rubber             |               |  | 5.25          | %                               |  |  | L+425       |     |  |      | 1,995,000  |  |                |   | 1,985,364  |  |  |   | 1,973,175  | 
|New Trident HoldCorp, Inc.                                                        |  |          | 07/31/2019 |  |          | Healthcare and Pharmaceuticals             |               |  | 6.50          | %                               |  |  | L+525       |     |  |      | 8,917,647  |  |                |   | 8,854,192  |  |  |   | 8,566,559  | 
|Physiotherapy Corporation (8)                                                     |  |          | 06/04/2021 |  |          | Healthcare and Pharmaceuticals             |               |  | 5.75          | %                               |  |  | L+475       |     |  |      | 3,500,000  |  |                |   | 3,482,889  |  |  |   | 3,491,250  | 
|PlayPower, Inc.                                                                   |  |          | 06/23/2021 |  |          | Construction and Building                  |               |  | 5.75          | %                               |  |  | L+475       |     |  |      | 3,990,000  |  |                |   | 3,951,094  |  |  |   | 3,970,050  | 
|Polyconcept Finance B.V.                                                          |  |          | 06/28/2019 |  |          | Consumer Goods: Non-Durable                |               |  | 6.00          | %                               |  |  | L+475       |     |  |      | 11,482,697 |  |                |   | 11,430,576 |  |  |   | 11,425,283 | 
|Premier Dental Services, Inc.                                                     |  |          | 11/01/2018 |  |          | Consumer Services                          |               |  | 6.00          | %                               |  |  | L+500       |     |  |      | 8,219,601  |  |                |   | 8,131,135  |  |  |   | 7,109,955  | 
|Profile Products LLC                                                              |  |          | 05/20/2021 |  |          | Environmental Industries                   |               |  | 6.00          | %                               |  |  | L+500       |     |  |      | 7,470,287  |  |                |   | 7,398,025  |  |  |   | 7,470,287  | 
|Profile Products LLC (Revolver) (8),
(10)                                         |  |          | 05/20/2020 |  |          | Environmental Industries                   |               |  |              |                                 |  |  |            |     |  |      | 2,459,016  |  |                |   |           |  |  |   |           | 
|Quality Home Brands Holdings LLC                                                  |  |          | 12/17/2018 |  |          | Consumer Goods: Durable                    |               |  | 7.75          | %                               |  |  | L+650       |     |  |      | 4,912,500  |  |                |   | 4,880,217  |  |  |   | 4,914,563  | 
|Research Now Group, Inc.                                                          |  |          | 03/18/2021 |  |          | High Tech Industries                       |               |  | 5.50          | %                               |  |  | L+450       |     |  |      | 6,965,000  |  |                |   | 6,931,604  |  |  |   | 6,912,763  | 
|Robertshaw US Holding Corp.                                                       |  |          | 06/18/2019 |  |          | Consumer Goods: Durable                    |               |  | 9.00          | %                               |  |  | L+750       |     |  |      | 3,582,758  |  |                |   | 3,557,217  |  |  |   | 3,575,247  | 
|Ryan, LLC                                                                         |  |          | 08/07/2020 |  |          | Business Services                          |               |  | 6.75          | %                               |  |  | L+575       |     |  |      | 4,443,750  |  |                |   | 4,378,244  |  |  |   | 4,382,648  | 
|Sotera Defense Solutions, Inc.                                                    |  |          | 04/21/2017 |  |          | Aerospace and Defense                      |               |  | 9.00          | %                               |  |  | L+750       |     |  |      | 6,101,682  |  |                |   | 5,946,657  |  |  |   | 5,491,514  | 
|St. Georges University Scholastic Services LLC (6), (11)                         |  |          | 08/09/2021 |  |          | Consumer Services                          |               |  | 5.75          | %                               |  |  | L+475       |     |  |      | 714,200    |  |                |   | 711,056    |  |  |   | 714,200    | 
|Surgical Specialties Corporation (US), Inc.                                       |  |          | 08/22/2018 |  |          | Healthcare and Pharmaceuticals             |               |  | 7.25          | %                               |  |  | L+575       |     |  |      | 10,037,432 |  |                |   | 10,017,760 |  |  |   | 9,937,058  | 
|Survey Sampling International, LLC                                                |  |          | 12/16/2020 |  |          | Business Services                          |               |  | 6.00          | %                               |  |  | L+500       |     |  |      | 6,218,750  |  |                |   | 6,171,308  |  |  |   | 6,164,336  | 
|Systems Maintenance Services Holding, Inc.                                        |  |          | 10/18/2019 |  |          | High Tech Industries                       |               |  | 5.00          | %                               |  |  | L+400       |     |  |      | 5,895,000  |  |                |   | 5,875,736  |  |  |   | 5,895,000  | 
|Tensar Corporation                                                                |  |          | 07/09/2021 |  |          | Construction and Building                  |               |  | 5.75          | %                               |  |  | L+475       |     |  |      | 4,950,000  |  |                |   | 4,906,969  |  |  |   | 4,588,056  | 
|TOMS Shoes, LLC                                                                   |  |          | 11/02/2020 |  |          | Consumer Goods: Non-Durable                |               |  | 6.50          | %                               |  |  | L+550       |     |  |      | 1,990,000  |  |                |   | 1,814,920  |  |  |   | 1,845,725  | 
|UniTek Global Services, Inc. (8)                                                  |  |          | 01/14/2019 |  |          | Telecommunications                         |               |  | 9.50(PIK 1.00 | % %)                            |  |  | L+850       |     |  |      | 430,126    |  |                |   | 430,126    |  |  |   | 430,126    | 
|UniTek Global Services, Inc. (8)                                                  |  |          | 01/14/2019 |  |          | Telecommunications                         |               |  | 8.50          | %                               |  |  | L+750       |     |  |      | 599,702    |  |                |   | 548,736    |  |  |   | 569,717    | 
|UniTek Global Services, Inc. (8),
(10)                                            |  |          | 01/14/2019 |  |          | Telecommunications                         |               |  |              |                                 |  |  |            |     |  |      | 151,090    |  |                |   |           |  |  |   |           | 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



53



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued)

SEPTEMBER 30, 2015



|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|------------------------------------------------------------------------ |  | ---------- |  | ------------------------------------------ |  | ------------- | --------------- | ---- | ------------------------------- |  | ------- | ----------- |  |  | ----------- |  |  | -------------- | ----------- |  |  | - | ----------- | -
|Issuer Name                                                              |  | Maturity   |  | Industry                                   |  | CurrentCoupon |                 |      | Basis PointSpreadAboveIndex (1) |  |         | Par /Shares |  |  | Cost        |  |  | Fair Value (2) |            
|U.S. Farathane, LLC                                                      |  | 02/07/2022 |  | Automotive                                 |  |               | 6.75            | %    |                                 |  | L+575   |             |  |  | 3,800,641   |  |  | $              | 3,729,952   |  |  | $ | 3,807,672   |  
|US Med Acquisition, Inc. (8)                                             |  | 08/13/2021 |  | Healthcare and Pharmaceuticals             |  |               | 10.00           | %    |                                 |  | L+900   |             |  |  | 3,121,094   |  |  |                | 3,121,094   |  |  |   | 3,121,094   |  
|Vistage Worldwide, Inc. (8)                                              |  | 08/19/2021 |  | Media: Broadcasting and Subscription       |  |               | 6.50            | %    |                                 |  | L+550   |             |  |  | 5,000,000   |  |  |                | 4,950,477   |  |  |   | 4,975,000   |  
|Wilton Brands, LLC                                                       |  | 08/30/2018 |  | Consumer Goods: Non-Durable                |  |               | 8.50            | %    |                                 |  | L+725   |             |  |  | 2,703,000   |  |  |                | 2,674,736   |  |  |   | 2,630,370   |  
|Worley Claims Services, LLC                                              |  | 10/30/2020 |  | Banking, Finance, Insurance and RealEstate |  |               | 9.00            | %    |                                 |  | L+800   |             |  |  | 6,490,688   |  |  |                | 6,429,955   |  |  |   | 6,490,688   |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Total First Lien Secured Debt                                            |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                | 335,790,073 |  |  |   | 332,180,834 |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Second Lien Secured Debt12.8%                                           |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Affinion Group, Inc. (8)                                                 |  | 10/31/2018 |  | Consumer Goods: Durable                    |  |               | 8.50            | %    |                                 |  | L+700   |             |  |  | 1,000,000   |  |  |                | 919,155     |  |  |   | 893,130     |  
|American Gilsonite Company(5), (8)                                       |  | 09/01/2017 |  | Metals and Mining                          |  |               | 11.50           | %    |                                 |  |        |             |  |  | 1,000,000   |  |  |                | 1,000,000   |  |  |   | 950,000     |  
|Douglas Products and Packaging Company LLC                               |  | 12/31/2020 |  | Chemicals, Plastics and Rubber             |  |               | 11.00           | %    |                                 |  | L+1,050 |             |  |  | 2,000,000   |  |  |                | 1,965,770   |  |  |   | 2,000,000   |  
|Howard Berger Co. LLC                                                    |  | 09/30/2020 |  | Wholesale                                  |  |               | 11.00           | %    |                                 |  | L+1,000 |             |  |  | 11,000,000  |  |  |                | 10,423,463  |  |  |   | 10,670,000  |  
|J.A. Cosmetics Holdings, Inc. (8)                                        |  | 07/31/2019 |  | Consumer Goods: Durable                    |  |               | 11.00           | %    |                                 |  | L+1,000 |             |  |  | 4,000,000   |  |  |                | 3,938,373   |  |  |   | 4,040,000   |  
|Language Line, LLC                                                       |  | 07/07/2022 |  | Consumer Services                          |  |               | 10.75           | %    |                                 |  | L+975   |             |  |  | 10,750,000  |  |  |                | 10,589,814  |  |  |   | 10,723,125  |  
|Novitex Acquisition, LLC                                                 |  | 07/07/2021 |  | Business Services                          |  |               | 11.75           | %    |                                 |  | L+1,050 |             |  |  | 11,000,000  |  |  |                | 10,902,202  |  |  |   | 10,780,000  |  
|Penton Media, Inc. (8)                                                   |  | 10/02/2020 |  | Media: Diversified and Production          |  |               | 9.00            | %    |                                 |  | L+775   |             |  |  | 5,252,824   |  |  |                | 5,194,116   |  |  |   | 5,230,920   |  
|Sunshine Oilsands Ltd. (5), (6), (8),
(11)                               |  | 08/01/2017 |  | Energy: Oil and Gas                        |  |               | 10.00           | %    |                                 |  |        |             |  |  | 2,812,500   |  |  |                | 2,697,607   |  |  |   | 2,615,625   |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Total Second Lien Secured Debt                                           |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                | 47,630,500  |  |  |   | 47,902,800  |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Subordinated Debt/Corporate Notes1.5%
(8)                               |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Affinion Group Holdings, Inc.                                            |  | 09/14/2018 |  | Consumer Goods: Durable                    |  |               |                | (7)  |                                 |  |        |             |  |  | 4,786,483   |  |  |                | 4,361,551   |  |  |   | 1,818,864   |  
|Affinion Investments LLC                                                 |  | 08/15/2018 |  | Consumer Goods: Durable                    |  |               |                | (7)  |                                 |  |        |             |  |  | 2,484,000   |  |  |                | 2,146,500   |  |  |   | 1,664,280   |  
|Credit Infonet, Inc.                                                     |  | 10/26/2018 |  | High Tech Industries                       |  |               | 13.00(PIK 1.75  | % %) |                                 |  |        |             |  |  | 2,025,065   |  |  |                | 1,999,885   |  |  |   | 1,992,841   |  
|UniTek Global Services, Inc.                                             |  | 07/15/2019 |  | Telecommunications                         |  |               | 15.00(PIK 15.00 | % %) |                                 |  |        |             |  |  | 126,259     |  |  |                | 126,259     |  |  |   | 126,259     |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Total Subordinated Debt/Corporate Notes                                  |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                | 8,634,195   |  |  |   | 5,602,244   |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Preferred Equity0.3%(7),
(8)                                            |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|J.A. Cosmetics US, Inc.                                                  |  |           |  | Consumer Goods: Durable                    |  |               | 8.00            | %    |                                 |  |        |             |  |  | 400         |  |  |                | 399,704     |  |  |   | 455,490     |  
|UniTek Global Services, Inc.                                             |  |           |  | Telecommunications                         |  |               | 13.50           | %    |                                 |  |        |             |  |  | 1,047,317   |  |  |                | 670,283     |  |  |   | 691,115     |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Total Preferred Equity                                                   |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                | 1,069,987   |  |  |   | 1,146,605   |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Common Equity/Warrants0.5% (7),
(8)                                     |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|A2Z Wireless Holdings, Inc.                                              |  |           |  | Retail                                     |  |               |                |      |                                 |  |        |             |  |  | 463         |  |  |                | 118,817     |  |  |   | 674,296     |  
|Affinion Group Holdings, Inc., Series A (Warrants)                       |  | 12/12/2023 |  | Consumer Goods: Durable                    |  |               |                |      |                                 |  |        |             |  |  | 554,715     |  |  |                | 1,186,649   |  |  |   | 291,226     |  
|Affinion Group Holdings, Inc., Series B (Warrants)                       |  | 12/12/2023 |  | Consumer Goods: Durable                    |  |               |                |      |                                 |  |        |             |  |  | 1,135,743   |  |  |                |            |  |  |   | 22,715      |  
|Faraday Holdings, LLC
(Interior Specialists, Inc.)                       |  |           |  | Construction and Building                  |  |               |                |      |                                 |  |        |             |  |  | 939         |  |  |                | 45,761      |  |  |   | 52,466      |  
|J.A. Cosmetics US, Inc.                                                  |  |           |  | Consumer Goods: Durable                    |  |               |                |      |                                 |  |        |             |  |  | 30          |  |  |                | 296         |  |  |   | 215,689     |  
|Patriot National, Inc. (Warrants)                                        |  | 11/27/2023 |  | Banking, Finance, Insurance and RealEstate |  |               |                |      |                                 |  |        |             |  |  | 14,484      |  |  |                | 28,002      |  |  |   | 190,609     |  
|UniTek Global Services, Inc.                                             |  |           |  | Telecommunications                         |  |               |                |      |                                 |  |        |             |  |  | 149,617     |  |  |                |            |  |  |   |            |  
|Vestcom Parent Holdings, Inc.                                            |  |           |  | Media: Advertising, Printing andPublishing |  |               |                |      |                                 |  |        |             |  |  | 15,179      |  |  |                | 56,895      |  |  |   | 255,899     |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Total Common Equity/Warrants                                             |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                | 1,436,420   |  |  |   | 1,702,900   |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies  |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  | 394,561,175 |  |  |                | 388,535,383 | 
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Investments in Controlled, Affiliated Portfolio Companies0.7%           |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             | 
|First Lien Secured Debt0.7%                                             |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|GMC Television Broadcasting Holdings, LLC (8),
(12)                      |  | 12/30/2016 |  | Media: Broadcasting and Subscription       |  |               | 4.33            | %    |                                 |  | L+400   | (9)         |  |  | 3,702,009   |  |  |                | 2,777,132   |  |  |   | 2,776,507   |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Total Investments104.9%                                                 |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                | 397,338,307 |  |  |   | 391,311,890 |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Cash Equivalents5.8%                                                    |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|BlackRock Liquidity Funds, Temp Cash and Temp Fund, Institutional Shares |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  | 21,428,514  |  |  |                | 21,428,514  | 
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Total Investments and Cash Equivalents110.7%                            |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  | $              | 418,766,821 |  |  | $ | 412,740,404 |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  
|Liabilities in Excess of Other Assets(10.7)%                            |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   | (39,849,955 | )
|Net Assets100.0%                                                        |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  | $ | 372,890,449 |  
|                                                                         |  |            |  |                                            |  |               |                 |      |                                 |  |         |             |  |  |             |  |  |                |             |  |  |   |             |  

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



54



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued)

SEPTEMBER 30, 2015





|(1) | Represents floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the applicable LIBOR or L, or Prime rate, or P. All securities are subject to a
LIBOR or Prime rate floor where a spread is provided, unless noted. The spread provided includes PIK interest and other fee rates, if any.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Valued based on our accounting policy (see Note 2).
|--- | ---------------------------------------------------

|(3) | The provisions of the 1940 Act classify investments based on the level of control that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is generally presumed to be
non-controlled when we own 25% or less of the portfolio companys voting securities and controlled when we own more than 25% of the portfolio companys voting securities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The provisions of the 1940 Act classify investments further based on the level of ownership that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is generally deemed as
non-affiliated when we own less than 5% of a portfolio companys voting securities and affiliated when we own 5% or more of a portfolio companys voting securities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Security is exempt from registration under Rule 144A promulgated under the Securities Act. The security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Non-U.S. company or principal place of business outside the United States.
|--- | --------------------------------------------------------------------------

|(7) | Non-income producing securities.
|--- | --------------------------------

|(8) | The securities are not pledged as collateral under the Credit Facility. All other securities are pledged as collateral under the Credit Facility and held through Funding I.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Coupon is not subject to a LIBOR or Prime rate floor.
|--- | -----------------------------------------------------

|(10) | Represents the purchase of a security with delayed settlement or a revolving line of credit that is currently an unfunded investment. This security does not earn a basis point spread above an index while it is unfunded.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | The investment is treated as a non-qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying
assets represent at least 70% of our total assets.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Became a controlled affiliate during the quarter ended September 30, 2015.
|---- | --------------------------------------------------------------------------

SEE NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



55



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

1. ORGANIZATION

PennantPark Floating Rate Capital Ltd. was organized as a Maryland corporation in October 2010. We are a closed-end, externally
managed, non-diversified investment company that has elected to be treated as a BDC under the 1940 Act.

Our investment objectives are to
generate current income and capital appreciation. We seek to achieve our investment objective by investing primarily in Floating Rate Loans and other investments made to U.S. middle-market private companies whose debt is rated below investment
grade. Floating Rate Loans pay interest at variable rates, which are determined periodically, on the basis of a floating base lending rate such as LIBOR, with or without a floor, plus a fixed spread. Under normal market conditions, we generally
expect that at least 80% of the value of our Managed Assets will be invested in Floating Rate Loans and other investments bearing a variable rate of interest, which may include, from time to time, variable rate derivative instruments. We generally
expect that senior secured debt, or first lien loans, will represent at least 65% of our overall portfolio. We generally expect to invest up to 35% of our overall portfolio opportunistically in other types of investments, including second lien, high
yield, mezzanine and distressed debt securities and, to a lesser extent, equity investments.

We entered into the Investment Management
Agreement with the Investment Adviser, an external adviser that manages our day-to-day operations. We also entered into the Administration Agreement with the Administrator, which provides the administrative services necessary for us to operate.

Funding I, our wholly owned subsidiary and a special purpose entity, was organized in Delaware as a limited liability company in May 2011. We
formed Funding I in order to establish our Credit Facility. The Investment Adviser serves as the collateral manager to Funding I and has irrevocably directed that the management fee owed with respect to such services is to be paid to us so long as
the Investment Adviser remains the collateral manager. This arrangement does not increase our consolidated management fee. The Credit Facility allows Funding I to borrow up to $350 million as of September 30, 2016 at LIBOR plus 200 basis points
during the revolving period. The Credit Facility is secured by all of the assets held by Funding I. See Note 11.

We have formed and expect
to continue to form certain Taxable Subsidiaries which are taxed as corporations for federal income tax purposes. Accordingly, the Taxable Subsidiaries will pay income taxes at regular corporate income tax rates. These Taxable Subsidiaries allow us
to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.

In August 2015, we completed the acquisition of MCG pursuant to the Agreement and Plan of Merger by and among MCG, our Investment Adviser
and the Company. As a result of the transactions completed by the Merger Agreement, MCG was ultimately merged with and into PFLT Funding II, LLC with PFLT Funding II, LLC as the surviving company. See Note 13.

2. SIGNIFICANT ACCOUNTING POLICIES

The
preparation of our Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of our assets and liabilities at the date of the Consolidated Financial Statements and
the reported amounts of income and expenses during the reported periods. In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements have been
included. Actual results could differ from these estimates due to changes in the economic and regulatory environment, financial markets and any other parameters used in determining such estimates and assumptions. We may reclassify certain prior
period amounts to conform to the current period presentation. We have eliminated all intercompany balances and transactions. References to ASC serve as a single source of accounting literature. Subsequent events are evaluated and disclosed as
appropriate for events occurring through the date the Consolidated Financial Statements are issued.

Our Consolidated Financial Statements
are prepared in accordance with GAAP, consistent with ASC 946, Financial Services  Investment Companies, and pursuant to the requirements for reporting on Form 10-K/Q and Article 6 or 10 of Regulation S-X, as appropriate. In accordance with
Article 6-09 of Regulation S-X, we have provided a Consolidated Statement of Changes in Net Assets in lieu of a Consolidated Statement of Changes in Stockholders Equity.

Our significant accounting policies consistently applied are as follows:

(a) Investment Valuations

We expect
that there may not be readily available market values for many of our investments, which are or will be in our portfolio, and we value such investments at fair value as determined in good faith by or under the direction of our board of directors
using a documented valuation policy and a consistently applied valuation process, as described in this Report. With respect to investments for which there is no readily available market value, the factors that the board of directors may take into
account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio companys ability to make payments and its earnings and discounted cash flow, the markets in which the
portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the
external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our
valuation and the difference may be material. See Note 5.

Our portfolio generally consists of illiquid securities, including debt and
equity investments. With respect to investments for which market quotations are not readily available, or for which market quotations are deemed not reflective of the fair value, our board of directors undertakes a multi-step valuation process each
quarter, as described below:



| | (1) | Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Investment Adviser responsible for the portfolio investment;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Preliminary valuation conclusions are then documented and discussed with the management of our Investment Adviser;
| | --- | ------------------------------------------------------------------------------------------------------------------



| | (3) | Our board of directors also engages independent valuation firms to conduct independent appraisals of our investments for which market quotations are not readily available or are readily available but deemed not
reflective of the fair value of the investment. The independent valuation firms review managements preliminary valuations in light of their own independent assessment and also in light of any market quotations obtained from an independent
pricing service, broker, dealer or market maker;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



56



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2016



| | (4) | The audit committee of our board of directors reviews the preliminary valuations of our Investment Adviser and those of the independent valuation firms on a quarterly basis, periodically assesses the valuation
methodologies of the independent valuation firms, and responds to and supplements the valuation recommendations of the independent valuation firms to reflect any comments; and
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Our board of directors discusses these valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of our Investment Adviser, the respective independent valuation firms
and the audit committee.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our board of directors generally uses market quotations to assess the value of our investments for
which market quotations are readily available. We obtain these market values from independent pricing services or at bid prices obtained from at least two brokers or dealers, if available, or otherwise from a principal market maker or a primary
market dealer. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may
independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available.

(b) Security Transactions, Revenue Recognition, and Realized/Unrealized Gains or Losses

Security transactions are recorded on a trade-date basis. We measure realized gains or losses by the difference between the net proceeds from
the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering prepayment penalties. Net change in
unrealized appreciation or depreciation reflects the change in the fair value of our portfolio investments and Credit Facility during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when
gains or losses are realized.

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans
and debt investments with contractual PIK interest, which represents interest accrued and added to the loan balance that generally becomes due at maturity, we will generally not accrue PIK interest when the portfolio company valuation indicates that
such PIK interest is not collectable. We do not accrue as a receivable interest on loans and debt investments if we have reason to doubt our ability to collect such interest. Loan origination fees, OID, market discount or premium and deferred
financing costs on liabilities, which we do not fair value, are capitalized and then accreted or amortized using the effective interest method as interest income. We record prepayment penalties on loans and debt investments as income. Dividend
income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts. Litigation settlements are accounted for in accordance with the gain contingency provisions of ASC 450-30.

Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or if there is reasonable doubt that
principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon
managements judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in managements judgment, are likely to remain current.

(c) Income Taxes

We have complied
with the requirements of Subchapter M of the Code and expect to be treated as a RIC for federal income tax purposes. As a result, we account for income taxes using the asset and liability method prescribed by ASC 740, Income Taxes. Under this
method, income taxes are provided for amounts currently payable and for amounts deferred as tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Based
upon our qualification and election to be treated as a RIC for federal income tax purposes, we typically do not incur any material level of federal income taxes. Although we are not subject to federal income taxes as a RIC, we may elect to retain a
portion of our calendar year income, which may result in an excise tax. For the fiscal years ended September 30, 2016, 2015 and 2014, we had accrued an excise tax of zero, $0.4 million and $0.5 million, respectively.

We recognize the effect of a tax position in our Consolidated Financial Statements when it is more likely than not, based on the technical
merits, that the position will be sustained upon examination by the applicable tax authority. Tax benefits of positions not considered to satisfy the more-likely-than-not threshold would be recorded as a tax expense. We did not have any
material uncertain tax positions or any unrecognized tax benefits that met the recognition or measurement criteria of ASC 740-10-25 as of the periods presented herein.

Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income
and net realized gains recognized for financial reporting purposes. Differences between tax regulations and GAAP may be permanent or temporary. Permanent differences are reclassified among capital accounts in the Consolidated Financial Statements to
reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.

(d) Distributions and Capital Transactions

Distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid, if any, as a distribution is ratified by the
board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually. The tax attributes for distributions will generally include ordinary income and
capital gains, but may also include qualified dividends and/or a return of capital.

Capital transactions, in connection with our dividend
reinvestment plan or through offerings of our common stock, are recorded when issued and offering costs are charged as a reduction of capital upon issuance of our common stock.

(e) Foreign Currency Translation

Our
books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:



| | 1. | Fair value of investment securities, other assets and liabilities  at the exchange rates prevailing at the end of the applicable period; and
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Purchases and sales of investment securities, income and expenses  at the exchange rates prevailing on the respective dates of such transactions.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------

Although net assets and fair values are presented based on the applicable foreign exchange rates described above, we do not isolate that portion
of the results of operations due to changes in foreign exchange rates on investments, other assets and debt from the fluctuations arising from changes in fair values of investments and liabilities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments and liabilities.



57



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2016



Foreign security and currency translations may involve certain considerations and risks not
typically associated with investing in U.S. companies and U.S. government securities. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic developments, which could
cause investments in foreign markets to be less liquid and prices to be more volatile than those of comparable U.S. companies or U.S. government securities.

(f) Consolidation

As permitted under
Regulation S-X and as explained by ASC 946-810-45, PennantPark Floating Rate Capital Ltd. will generally not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business
consists of providing services to us. Accordingly, we have consolidated the results of our subsidiaries in our Consolidated Financial Statements.

(g)
Asset Transfers and Servicing

Asset transfers that do not meet ASC 860, Transfers and Servicing, requirements for sale accounting
treatment are reflected in the Consolidated Statement of Assets and Liabilities as investments. The creditors of Funding I have received a security interest in all its assets and such assets are not intended to be available to the creditors of
PennantPark Floating Rate Capital Ltd. or any of its affiliates.

3. AGREEMENTS

The Investment Management Agreement with the Investment Adviser was reapproved by our board of directors, including a majority of our directors
who are not interested persons of us or the Investment Advisers, in February 2016. Under the Investment Management Agreement, the Investment Adviser, subject to the overall supervision of our board of directors, manages the day-to-day operations of
and provides investment advisory services to us. The Investment Adviser serves as the collateral manager to Funding I and has irrevocably directed that the management fee owed with respect to such services is to be paid to the Company so long as the
Investment Adviser remains the collateral manager. This arrangement does not increase our consolidated management fee. For providing these services, the Investment Adviser receives a fee from us consisting of two componentsa base management
fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.00% of our average adjusted gross
assets, which equals our gross assets (net of U.S. Treasury Bills, temporary draws under any credit facility, cash and cash equivalents, repurchase agreements or other balance sheet transactions undertaken at the end of a fiscal quarter for
purposes of preserving investment flexibility for the next quarter and adjusted to exclude cash, cash equivalents and unfunded commitments, if any) and is payable quarterly in arrears. The base management fee is calculated based on the average
adjusted gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. For example, if we sold shares on the 45th day of a quarter
and did not use the proceeds from the sale to repay outstanding indebtedness, our gross assets for such quarter would give effect to the net proceeds of the issuance for only 45 days of the quarter during which the additional shares were
outstanding. For the fiscal years ended September 30, 2016, 2015 and 2014, the Investment Adviser earned a base management fee of $5.0 million, $3.6 million and $3.7 million, respectively, from us.

The incentive fee has two parts, as follows:

One part is calculated and payable quarterly in arrears based on our Pre-Incentive Fee Net Investment Income for the immediately preceding
calendar quarter. For this purpose, Pre-Incentive Fee Net Investment Income means interest income, dividend income and any other income, including any other fees (other than fees for providing managerial assistance), such as amendment, commitment,
origination, prepayment penalties, structuring, diligence and consulting fees or other fees received from portfolio companies, accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, any
expenses payable under the Administration Agreement and any interest expense or amendment fees under any credit facility and distribution paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net
Investment Income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income not yet received in cash. Pre-Incentive Fee Net Investment Income
does not include any realized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a percentage of the value of our net assets at the end
of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7.00% annualized). We pay the Investment Adviser an incentive fee with respect to our Pre-Incentive Fee Net Investment Income in each calendar
quarter as follows: (1) no incentive fee in any calendar quarter in which our Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 1.75%, (2) 50% of our Pre-Incentive Fee Net Investment Income with respect to that
portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.9167% in any calendar quarter (11.67% annualized) (we refer to this portion of our Pre-Incentive Fee Net Investment Income (which
exceeds the hurdle but is less than 2.9167%) as the catch-up, which is meant to provide our Investment Adviser with 20% of our Pre-Incentive Fee Net Investment Income, as if a hurdle did not apply, if this net investment income exceeds
2.9167% in any calendar quarter), and (3) 20% of the amount of our Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.9167% in any calendar quarter. These calculations are pro-rated for any share issuances or repurchases during the
relevant quarter, if applicable. For the years ended September 30, 2016, 2015 and 2014, the Investment Adviser earned $3.7 million, $2.2 million and $2.6 million, respectively, in incentive fees on net investment income from us.

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the
Investment Management Agreement, as of the termination date) and equals 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized
capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. For the fiscal years ended September 30, 2016, 2015 and 2014 the Investment Adviser accrued an incentive fee on capital
gains of approximately zero, $(0.4) million and $0.8 million, respectively, as calculated under the Investment Management Agreement (as described above).

Under GAAP, we are required to accrue a capital gains incentive fee based upon net realized capital gains and net unrealized capital
appreciation and depreciation on investments held at the end of each period. In calculating the capital gains incentive fee accrual, we considered the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains
incentive fee would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the Investment Management
Agreement. This accrual is calculated using the aggregate cumulative realized capital gains and losses and cumulative unrealized capital appreciation or depreciation. If such amount is positive at the end of a period, then we record a capital gains
incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains related to incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. There can be no assurance that such
unrealized capital appreciation will be realized in the future. The incentive fee accrued for under GAAP on our unrealized and realized capital gains for the years ended September 30, 2016, 2015 and 2014 was $1.1 million, $(0.7) million and
$0.1 million, respectively.



58



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2016



The Administration Agreement with the Administrator was reapproved by our board of directors,
including a majority of the directors who are not interested persons of us, in February 2016. Under the Administration Agreement, the Administrator provides administration services and office facilities to us. For providing these services,
facilities and personnel, we have agreed to reimburse the Administrator for its allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent and our
allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer and their respective staffs. The Administrator also offers, on our behalf, managerial assistance to portfolio companies to
which we are required to offer such assistance. Reimbursement for certain of these costs is included in administrative services expenses in the Consolidated Statements of Operations. For the years ended September 30, 2016, 2015 and 2014, the
Investment Adviser was reimbursed approximately $0.8 million, $0.5 million and $0.5 million, respectively, from us, including expenses the Investment Adviser incurred on behalf of the Administrator, for services described above.

4. INVESTMENTS

Purchases of investments,
including PIK, for the years ended September 30, 2016, 2015 and 2014 totaled $364.6 million, $224.8 million and $248.8 million, respectively. Sales and repayments of investments for the same periods totaled $164.2 million, $195.0 million and
$225.6 million, respectively.

Investments and cash and cash equivalents consisted of the following:



|                                             |  |                    |             |  |                    |   |             |      |  |   |             |  |  |   |             | 
|-------------------------------------------- |  | ------------------ | ----------- |  | ------------------ | - | ----------- | ---- |  | - | ----------- |  |  | - | ----------- | 
|                                             |  | September 30, 2016 |             |  | September 30, 2015 |  
|Investment Classification                    |  | Cost               |             |  | Fair Value         |   |             | Cost |  |   | Fair Value  | 
|First lien                                   |  | $                  | 549,736,982 |  |                    | $ | 548,410,095 |      |  | $ | 338,567,205 |  |  | $ | 334,957,341 | 
|Second lien                                  |  |                    | 38,404,428  |  |                    |   | 36,596,692  |      |  |   | 47,630,500  |  |  |   | 47,902,800  | 
|Subordinated debt / corporate notes          |  |                    | 3,228,083   |  |                    |   | 3,160,372   |      |  |   | 8,634,195   |  |  |   | 5,602,244   | 
|Preferred equity / common equity / warrants  |  |                    | 6,540,774   |  |                    |   | 10,720,366  |      |  |   | 2,506,407   |  |  |   | 2,849,505   | 
|                                             |  |                    |             |  |                    |   |             |      |  |   |             |  |  |   |             | 
|Total investments                            |  |                    | 597,910,267 |  |                    |   | 598,887,525 |      |  |   | 397,338,307 |  |  |   | 391,311,890 | 
|                                             |  |                    |             |  |                    |   |             |      |  |   |             |  |  |   |             | 
|Cash and cash equivalents                    |  |                    | 28,903,359  |  |                    |   | 28,910,973  |      |  |   | 21,428,514  |  |  |   | 21,428,514  | 
|                                             |  |                    |             |  |                    |   |             |      |  |   |             |  |  |   |             | 
|Total investments, cash and cash equivalents |  | $                  | 626,813,626 |  |                    | $ | 627,798,498 |      |  | $ | 418,766,821 |  |  | $ | 412,740,404 | 
|                                             |  |                    |             |  |                    |   |             |      |  |   |             |  |  |   |             | 

The table below describes investments by industry classification and enumerates the percentage, by fair value,
of the total portfolio assets (excluding cash equivalents) in such industries:



|                                            |  |                     |     |   |      |  |     |  
|------------------------------------------- |  | ------------------- | --- | - | ---- |  | --- | -
|                                            |  | As of September 30, |    
|Industry Classification                     |  | 2016                |     |   | 2015 | 
|Healthcare and Pharmaceuticals              |  |                     | 10  | % |      |  | 12  | %
|High Tech Industries                        |  |                     | 10  |   |      |  | 13  |  
|Business Services                           |  |                     | 8   |   |      |  | 10  |  
|Consumer Goods: Durable                     |  |                     | 7   |   |      |  | 8   |  
|Hotel, Gaming and Leisure                   |  |                     | 6   |   |      |  | 5   |  
|Telecommunications                          |  |                     | 6   |   |      |  | 2   |  
|Aerospace and Defense                       |  |                     | 5   |   |      |  | 3   |  
|Capital Equipment                           |  |                     | 5   |   |      |  |    |  
|Media: Diversified and Production           |  |                     | 5   |   |      |  | 1   |  
|Retail                                      |  |                     | 5   |   |      |  | 8   |  
|Wholesale                                   |  |                     | 5   |   |      |  | 3   |  
|Consumer Goods: Non-Durable                 |  |                     | 4   |   |      |  | 4   |  
|Media: Advertising, Printing and Publishing |  |                     | 4   |   |      |  | 4   |  
|Chemicals, Plastics and Rubber              |  |                     | 3   |   |      |  | 4   |  
|Construction and Building                   |  |                     | 3   |   |      |  | 6   |  
|Banking, Finance, Insurance and Real Estate |  |                     | 2   |   |      |  | 2   |  
|Beverage, Food and Tobacco                  |  |                     | 2   |   |      |  |    |  
|Consumer Services                           |  |                     | 2   |   |      |  | 6   |  
|Media: Broadcasting and Subscription        |  |                     | 2   |   |      |  | 2   |  
|Automotive                                  |  |                     | 1   |   |      |  | 3   |  
|All Other                                   |  |                     | 5   |   |      |  | 4   |  
|                                            |  |                     |     |   |      |  |     |  
|Total                                       |  |                     | 100 | % |      |  | 100 | %
|                                            |  |                     |     |   |      |  |     |  



59



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2016



5. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value, as defined under ASC 820, is the price that we would receive upon selling an investment or pay to transfer a liability in an orderly
transaction to a market participant in the principal or most advantageous market for the investment or liability. ASC 820 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs.
Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants
would use in pricing an asset or liability based on market data obtained from sources independent of us. Unobservable inputs reflect the assumptions market participants would use in pricing an asset or liability based on the best information
available to us on the reporting period date.

ASC 820 classifies the inputs used to measure these fair values into the following
hierarchies:



|         |  |                                                                                                                                                                                                                                                                                                                                                                  
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1: |  | Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities, accessible by us at the measurement date.                                                                                                                                                                                                                      
|         | 
|Level 2: |  | Inputs that are quoted prices for similar assets or liabilities in active markets, or that are quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term, if applicable, of the financial instrument.
|         | 
|Level 3: |  | Inputs that are unobservable for an asset or liability because they are based on our own assumptions about how market participants would price the asset or liability.                                                                                                                                                                                           

A financial instruments categorization within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. Generally, most of our investments and our Credit Facility are classified as Level 3. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily
available market value, the price used in an actual transaction may be different than our valuation and those differences may be material.

The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is
available, such information may be the result of consensus pricing information, disorderly transactions or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of
consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence were available. Corroborating evidence that would result in classifying these non-binding
broker/dealer bids as a Level 2 asset includes observable market-based transactions for the same or similar assets or other relevant observable market-based inputs that may be used in pricing an asset.

Our investments are generally structured as Floating Rate Loans, mainly senior secured debt, but also may include second lien, high yield,
mezzanine and distressed debt securities and equity investments. The transaction price, excluding transaction costs, is typically the best estimate of fair value at inception. Ongoing reviews by our Investment Adviser and independent valuation firms
are based on an assessment of each underlying investment, incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information including comparable
transactions, performance multiples and yields, among other factors. These non-public investments using unobservable inputs are included in Level 3 of the fair value hierarchy.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in our ability to observe valuation inputs may
result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the end of the quarter in which the
reclassifications occur. Our ability to observe valuation inputs resulted in one reclassification from Level 2 to 1 and one reclassification from Level 3 to Level 2 during the year ended September 30, 2016. During the year ended
September 30, 2015, there were two reclassifications from Level 2 to 3 and one reclassification from Level 3 to 2.

In addition to
using the above inputs in cash equivalents, investments and our Credit Facility valuations, we employ the valuation policy approved by our board of directors that is consistent with ASC 820. Consistent with our valuation policy, we evaluate the
source of inputs, including any markets in which our investments are trading, in determining fair value. See Note 2 and 2(e).

As outlined
in the table below, some of our Level 3 investments using a market approach valuation technique are valued using the average of the bids from brokers or dealers. The bids include a disclaimer, may not have corroborating evidence, may be the result
of a disorderly transaction and may be the result of consensus pricing. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such market quote
does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available.

The remainder of our portfolio and our long-term Credit Facility are valued using a market comparable or an enterprise market value technique.
With respect to investments for which there is no readily available market value, the factors that the board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any
collateral, the portfolio companys ability to make payments, its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external
event such as a purchase transaction, public offering or subsequent equity sale occurs, the pricing indicated by the external event, excluding transaction costs, is used to corroborate the valuation. When using earnings multiples to value a
portfolio company, the multiple used requires the use of judgment and estimates in determining how a market participant would price such an asset. These non-public investments using unobservable inputs are included in Level 3 of the fair value
hierarchy. Generally, the sensitivity of unobservable inputs or combination of inputs such as industry comparable companies, market outlook, consistency, discount rates and reliability of earnings and prospects for growth, or lack thereof, affects
the multiple used in pricing an investment. As a result, any change in any one of those factors may have a significant impact on the valuation of an investment.



60



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2016



Our Level 3 valuation techniques, unobservable inputs and ranges were categorized as follows
for ASC 820 purposes:



|                          |  |                                    |             |  |                     |                         |                    |                          |                                  |                     
|------------------------- |  | ---------------------------------- | ----------- |  | ------------------- | ----------------------- | ------------------ | ------------------------ | -------------------------------- | --------------------
|Asset Category            |  | Fair Value as ofSeptember 30, 2016 |             |  | Valuation Technique |                         | Unobservable Input |                          | Range of Input(Weighted Average)
|Debt investments          |  | $                                  | 273,399,858 |  |                     | Market Comparable       |                    | Broker/Dealer bid quotes |                                  | N/A                 
|Debt investments          |  |                                    | 314,767,301 |  |                     | Market Comparable       |                    | Market Yield             |                                  | 5.3%  16.5% (8.9%) 
|Equity investments        |  |                                    | 7,655,677   |  |                     | Enterprise Market Value |                    | EBITDA multiple          |                                  | 4.3x  9.0x (7.2x)  
|                          |  |                                    |             |  |                     |                         |                    |                          |                                  |                     
|Total Level 3 investments |  | $                                  | 595,822,836 |  |                     |                         |                    |                          |                                  |                     
|                          |  |                                    |             |  |                     |                         |                    |                          |                                  |                     
|Long-Term Credit Facility |  | $                                  | 232,389,498 |  |                     | Market Comparable       |                    | Market Yield             |                                  | 3.4%                
|                          |  |                                    |             |  |                     |                         |                    |                          |                                  |                     
|                          |  |                                    |             | 
|Asset Category            |  | Fair Value as ofSeptember 30, 2015 |             |  | Valuation Technique |                         | Unobservable Input |                          | Range of Input(Weighted Average)
|Debt investments          |  | $                                  | 259,566,475 |  |                     | Market Comparable       |                    | Broker/Dealer bid quotes |                                  | N/A                 
|Debt investments          |  |                                    | 128,895,910 |  |                     | Market Comparable       |                    | Market Yield             |                                  | 5.5%  34.7% (10.6%)
|Equity investments        |  |                                    | 313,941     |  |                     | Market Comparable       |                    | Broker/Dealer bid quotes |                                  | N/A                 
|Equity investments        |  |                                    | 2,344,955   |  |                     | Enterprise Market Value |                    | EBITDA multiple          |                                  | 6.0x  10.5x (7.6x) 
|                          |  |                                    |             |  |                     |                         |                    |                          |                                  |                     
|Total Level 3 investments |  | $                                  | 391,121,281 |  |                     |                         |                    |                          |                                  |                     
|                          |  |                                    |             |  |                     |                         |                    |                          |                                  |                     
|Long-Term Credit Facility |  | $                                  | 29,600,000  |  |                     | Market Comparable       |                    | Market Yield             |                                  | 2.9%                
|                          |  |                                    |             |  |                     |                         |                    |                          |                                  |                     

Our investments, cash and cash equivalents and Credit Facility were categorized as follows in the fair value
hierarchy for ASC 820 purposes:



|                                                       |  |                                  |             |  |         |   |            |         |  |   |           |  |  |   |             | 
|------------------------------------------------------ |  | -------------------------------- | ----------- |  | ------- | - | ---------- | ------- |  | - | --------- |  |  | - | ----------- | 
|                                                       |  | Fair Value at September 30, 2016 |            
|Description                                            |  | Fair Value                       |             |  | Level 1 |   |            | Level 2 |  |   | Level 3   | 
|Debt investments (First lien)                          |  | $                                | 548,410,095 |  |         | $ |           |         |  | $ |          |  |  | $ | 548,410,095 | 
|Debt investments (Second lien)                         |  |                                  | 36,596,692  |  |         |   |           |         |  |   |          |  |  |   | 36,596,692  | 
|Debt investments (Subordinated debt / corporate notes) |  |                                  | 3,160,372   |  |         |   |           |         |  |   |          |  |  |   | 3,160,372   | 
|Equity investments                                     |  |                                  | 10,720,366  |  |         |   | 106,922    |         |  |   | 2,957,767 |  |  |   | 7,655,677   | 
|                                                       |  |                                  |             |  |         |   |            |         |  |   |           |  |  |   |             | 
|Total investments                                      |  |                                  | 598,887,525 |  |         |   | 106,922    |         |  |   | 2,957,767 |  |  |   | 595,822,836 | 
|                                                       |  |                                  |             |  |         |   |            |         |  |   |           |  |  |   |             | 
|Cash and cash equivalents                              |  |                                  | 28,910,973  |  |         |   | 28,910,973 |         |  |   |          |  |  |   |            | 
|                                                       |  |                                  |             |  |         |   |            |         |  |   |           |  |  |   |             | 
|Total investments, cash and cash equivalents           |  | $                                | 627,798,498 |  |         | $ | 29,017,895 |         |  | $ | 2,957,767 |  |  | $ | 595,822,836 | 
|                                                       |  |                                  |             |  |         |   |            |         |  |   |           |  |  |   |             | 
|Long-Term Credit Facility                              |  | $                                | 232,389,498 |  |         | $ |           |         |  | $ |          |  |  | $ | 232,389,498 | 
|                                                       |  |                                  |             |  |         |   |            |         |  |   |           |  |  |   |             | 
|                                                       | 
|                                                       |  | Fair Value at September 30, 2015 |            
|Description                                            |  | Fair Value                       |             |  | Level 1 |   |            | Level 2 |  |   | Level 3   | 
|Debt investments (First lien)                          |  | $                                | 334,957,341 |  |         | $ |           |         |  | $ |          |  |  | $ | 334,957,341 | 
|Debt investments (Second lien)                         |  |                                  | 47,902,800  |  |         |   |           |         |  |   |          |  |  |   | 47,902,800  | 
|Debt investments (Subordinated debt / corporate notes) |  |                                  | 5,602,244   |  |         |   |           |         |  |   |          |  |  |   | 5,602,244   | 
|Equity investments                                     |  |                                  | 2,849,505   |  |         |   |           |         |  |   | 190,609   |  |  |   | 2,658,896   | 
|                                                       |  |                                  |             |  |         |   |            |         |  |   |           |  |  |   |             | 
|Total investments                                      |  |                                  | 391,311,890 |  |         |   |           |         |  |   | 190,609   |  |  |   | 391,121,281 | 
|                                                       |  |                                  |             |  |         |   |            |         |  |   |           |  |  |   |             | 
|Cash equivalents                                       |  |                                  | 21,428,514  |  |         |   | 21,428,514 |         |  |   |          |  |  |   |            | 
|                                                       |  |                                  |             |  |         |   |            |         |  |   |           |  |  |   |             | 
|Total investments, cash and cash equivalents           |  | $                                | 412,740,404 |  |         | $ | 21,428,514 |         |  | $ | 190,609   |  |  | $ | 391,121,281 | 
|                                                       |  |                                  |             |  |         |   |            |         |  |   |           |  |  |   |             | 
|Long-Term Credit Facility                              |  | $                                | 29,600,000  |  |         | $ |           |         |  | $ |          |  |  | $ | 29,600,000  | 
|                                                       |  |                                  |             |  |         |   |            |         |  |   |           |  |  |   |             | 



61



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2016



The tables below show a reconciliation of the beginning and ending balances for fair valued
investments measured using significant unobservable inputs (Level 3):



|                                                                                                                                                                                                                                                |  |                               |              |   |                                                    |   |             |        |  |   |              |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------------ | - | -------------------------------------------------- | - | ----------- | ------ |  | - | ------------ | -
|                                                                                                                                                                                                                                                |  | Year Ended September 30, 2016 |             
|Description                                                                                                                                                                                                                                     |  | First Lien                    |              |   | Second lien,subordinateddebt and equityinvestments |   |             | Totals | 
|Beginning Balance                                                                                                                                                                                                                               |  | $                             | 334,957,341  |   |                                                    | $ | 56,163,940  |        |  | $ | 391,121,281  |  
|Net realized gains (losses)                                                                                                                                                                                                                     |  |                               | 744,464      |   |                                                    |   | (2,223,584  | )      |  |   | (1,479,120   | )
|Net unrealized appreciation                                                                                                                                                                                                                     |  |                               | 2,282,976    |   |                                                    |   | 4,804,379   |        |  |   | 7,087,355    |  
|Purchases, PIK, net discount accretion and non-cash exchanges                                                                                                                                                                                   |  |                               | 357,140,895  |   |                                                    |   | 9,088,987   |        |  |   | 366,229,882  |  
|Sales, repayments and non-cash exchanges                                                                                                                                                                                                        |  |                               | (146,715,581 | ) |                                                    |   | (17,463,214 | )      |  |   | (164,178,795 | )
|Transfers in and/or out of Level 3                                                                                                                                                                                                              |  |                               |             |   |                                                    |   | (2,957,767  | )      |  |   | (2,957,767   | )
|                                                                                                                                                                                                                                                |  |                               |              |   |                                                    |   |             |        |  |   |              |  
|Ending Balance                                                                                                                                                                                                                                  |  | $                             | 548,410,095  |   |                                                    | $ | 47,412,741  |        |  | $ | 595,822,836  |  
|                                                                                                                                                                                                                                                |  |                               |              |   |                                                    |   |             |        |  |   |              |  
|Net change in unrealized appreciation (depreciation) reported within the net change in unrealized
appreciation on investments in our Consolidated Statements of Operations attributable to our Level 3 assets still held at the reporting date. |  | $                             | 2,617,111    |   |                                                    | $ | (693,738    | )      |  | $ | 1,923,373    |  
|                                                                                                                                                                                                                                                |  |                               |              |   |                                                    |   |             |        |  |   |              |  
|                                                                                                                                                                                                                                                | 
|                                                                                                                                                                                                                                                |  | Year Ended September 30, 2015 |             
|Description                                                                                                                                                                                                                                     |  | First Lien                    |              |   | Second lien,subordinateddebt and equityinvestments |   |             | Totals | 
|Beginning Balance                                                                                                                                                                                                                               |  | $                             | 302,565,355  |   |                                                    | $ | 40,707,230  |        |  | $ | 343,272,585  |  
|Net realized (losses) gains                                                                                                                                                                                                                     |  |                               | (175,862     | ) |                                                    |   | 667,008     |        |  |   | 491,146      |  
|Net unrealized depreciation                                                                                                                                                                                                                     |  |                               | (3,286,024   | ) |                                                    |   | (2,397,090  | )      |  |   | (5,683,114   | )
|Purchases, PIK, net discount accretion and non-cash exchanges(1)                                                                                                                                                                                |  |                               | 215,410,313  |   |                                                    |   | 27,790,325  |        |  |   | 243,200,638  |  
|Sales, repayments and non-cash exchanges                                                                                                                                                                                                        |  |                               | (179,556,441 | ) |                                                    |   | (15,493,137 | )      |  |   | (195,049,578 | )
|Transfers in and/or out of Level 3                                                                                                                                                                                                              |  |                               |             |   |                                                    |   | 4,889,604   |        |  |   | 4,889,604    |  
|                                                                                                                                                                                                                                                |  |                               |              |   |                                                    |   |             |        |  |   |              |  
|Ending Balance                                                                                                                                                                                                                                  |  | $                             | 334,957,341  |   |                                                    | $ | 56,163,940  |        |  | $ | 391,121,281  |  
|                                                                                                                                                                                                                                                |  |                               |              |   |                                                    |   |             |        |  |   |              |  
|Net change in unrealized depreciation reported within the net change in unrealized appreciation on
investments in our Consolidated Statements of Operations attributable to our Level 3 assets still held at the reporting date.                |  | $                             | (3,449,989   | ) |                                                    | $ | (2,257,945  | )      |  | $ | (5,707,934   | )
|                                                                                                                                                                                                                                                |  |                               |              |   |                                                    |   |             |        |  |   |              |  



|(1) | Includes assets acquired from MCG.
|--- | ----------------------------------



62



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2016



The following table shows a reconciliation of the beginning and ending balances for fair
valued liabilities measured using significant unobservable inputs (Level 3):



|                                                                      |  |                           |             |   |      |   |              |  
|--------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ------------ | -
|                                                                      |  | Carrying/Fair Value       |            
|                                                                      |  | Years Ended September 30, |            
|Long-Term Credit
Facility                                             |  | 2016                      |             |   | 2015 |  
|Beginning Balance (cost  $29,600,000 and $146,400,000, respectively) |  | $                         | 29,600,000  |   |      | $ | 146,949,000  |  
|Total unrealized depreciation included in earnings                    |  |                           | (518,002    | ) |      |   | (549,000     | )
|Borrowings                                                            |  |                           | 260,707,500 |   |      |   | 130,700,000  |  
|Repayments                                                            |  |                           | (57,400,000 | ) |      |   | (247,500,000 | )
|Transfers in and/or out of Level 3                                    |  |                           |            |   |      |   |             |  
|                                                                      |  |                           |             |   |      |   |              |  
|Ending Balance (cost  $232,907,500 and $29,600,000, respectively)    |  | $                         | 232,389,498 |   |      | $ | 29,600,000   |  
|                                                                      |  |                           |             |   |      |   |              |  

As of September 30, 2016, we had outstanding non-U.S. dollar borrowings on our Credit Facility. Net change
in fair value from foreign currency translating on outstanding borrowings is listed below:



|                 |  |                |            |  |                        |   |            |               |  |   |            |  |  |                     |                 |  |  |   |         | 
|---------------- |  | -------------- | ---------- |  | ---------------------- | - | ---------- | ------------- |  | - | ---------- |  |  | ------------------- | --------------- |  |  | - | ------- | 
|Foreign Currency |  | Local Currency |            |  | OriginalBorrowing Cost |   |            | Current Value |  |   | Reset Date |  |  | Change in FairValue |                
|Canadian Dollars |  | C$             | 17,500,000 |  |                        | $ | 12,407,501 |               |  | $ | 13,338,920 |  |  |                     | October 3, 2016 |  |  | $ | 931,419 | 

The carrying value of our consolidated financial liabilities approximates fair value. We adopted ASC 825-10,
which provides companies with an option to report selected financial assets and liabilities at fair value, and made an irrevocable election to apply ASC 825-10 to our Credit Facility. We elected to use the fair value option for our Credit Facility
to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. Due to that election and in accordance with GAAP, we incurred expenses of $0.9 million, $2.3
million and $0.7 million relating to amendment fees on the Credit Facility during the years ended September 30, 2016, 2015 and 2014, respectively. ASC 825-10 establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect on earnings of a companys choice to use fair value. ASC 825-10 also requires
entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statements of Assets and Liabilities and changes in fair value of the Credit Facility are reported in our Consolidated Statements of
Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities. For the fiscal years ended September 30, 2016 and 2015, our Credit Facility had a net change in unrealized depreciation of $0.5 million and $0.5
million, respectively. As of September 30, 2016 and 2015, the net unrealized depreciation on our Credit Facility totaled $0.5 million and zero, respectively. We use a nationally recognized independent valuation service to measure the fair value
of our Credit Facility in a manner consistent with the valuation process that the board of directors uses to value our investments.

6. TRANSACTIONS WITH
AFFILIATED COMPANIES

An affiliated portfolio company is a company in which we have ownership of 5% or more of its voting securities. A
portfolio company is generally presumed to be a non-controlled affiliate when we own at least 5% but 25% or less of its voting securities and a controlled affiliate when we own more than 25% of its voting securities. Transactions related to our
funded investments with both controlled and non-controlled affiliates for the nine months ended September 30, 2016 were as follows:



|                                          |  |                                 |           |  |                                     |   |   |                                       |  |   |               |   |  |                                 |         |  |                            |   |   |  |  |   |   | 
|----------------------------------------- |  | ------------------------------- | --------- |  | ----------------------------------- | - | - | ------------------------------------- |  | - | ------------- | - |  | ------------------------------- | ------- |  | -------------------------- | - | - |  |  | - | - | 
|Name of Investment                        |  | Fair Value atSeptember 30, 2015 |           |  | Purchases of /Advances toAffiliates |   |   | Sale of /Distributionsfrom Affiliates |  |   | IncomeAccrued |   |  | Fair Value atSeptember 30, 2016 |         |  | Net RealizedGains (Losses) |  
|Controlled Affiliates                     |  |                                 |           |  |                                     |   |   |                                       |  |   |               |   |  |                                 |         |  |                            |   |   |  |  |   |   | 
|GMC Television Broadcasting Holdings, LLC |  | $                               | 2,776,507 |  |                                     | $ |  |                                       |  | $ | (2,777,132    | ) |  | $                               | 105,502 |  |                            | $ |  |  |  | $ |  | 
|                                          |  |                                 |           |  |                                     |   |   |                                       |  |   |               |   |  |                                 |         |  |                            |   |   |  |  |   |   | 
|Total Controlled Affiliates               |  | $                               | 2,776,507 |  |                                     | $ |  |                                       |  | $ | (2,777,132    | ) |  | $                               | 105,502 |  |                            | $ |  |  |  | $ |  | 
|                                          |  |                                 |           |  |                                     |   |   |                                       |  |   |               |   |  |                                 |         |  |                            |   |   |  |  |   |   | 

7. CHANGE IN NET ASSETS FROM OPERATIONS PER COMMON SHARE

The following information sets forth the computation of basic and diluted per share net increase in net assets resulting from operations:



|                                                                                 |  |                           |            |  |      |   |            |      |  |   |            | 
|-------------------------------------------------------------------------------- |  | ------------------------- | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- | 
|                                                                                 |  | Years Ended September 30, |           
|                                                                                 |  | 2016                      |            |  | 2015 |   |            | 2014 | 
|Numerator for net increase in net assets resulting from operations               |  | $                         | 33,488,663 |  |      | $ | 12,504,245 |      |  | $ | 20,513,971 | 
|Denominator for basic and diluted weighted average shares                        |  |                           | 26,730,074 |  |      |   | 16,291,965 |      |  |   | 14,898,056 | 
|Basic and diluted net increase in net assets per share resulting from operations |  | $                         | 1.25       |  |      | $ | 0.77       |      |  | $ | 1.38       | 



63



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

SEPTEMBER 30, 2016



8. TAXES AND DISTRIBUTIONS

Distributions from net investment income and net realized capital gains are determined in accordance with U.S. federal tax regulations, which
may materially differ from amounts determined in accordance with GAAP. These book-to-tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are reclassified to undistributed net investment
income, accumulated net realized gain or paid-in-capital, as appropriate. Distributions from net realized capital gains, if any, are normally declared and paid annually, but the Company may make distributions on a more frequent basis to comply with
the distribution requirements for RICs under the Code.

As of September 30, 2016 and 2015, the cost of investments for federal income
tax purposes was $600.1 million and $399.6 million, respectively, resulting in a gross unrealized appreciation of $10.6 million and $3.3 million, respectively, and depreciation of $11.8 million and $11.6 million, respectively.

The following amounts were reclassified for tax purposes:



|                                                |  |                           |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                |  | Years Ended September 30, |         
|                                                |  | 2016                      |          |   | 2015 |   |          | 2014 | 
|Decrease in paid-in capital                     |  | $                         | (308,435 | ) |      | $ | (429,892 | )    |  | $ | (254,753 | )
|Increase in accumulated net realized gain       |  |                           |         |   |      |   |         |      |  |   | 9,384    |  
|Increase in undistributed net investment income |  |                           | 308,435  |   |      |   | 429,892  |      |  |   | 245,369  |  

The following reconciles net increase in net assets resulting from operations to taxable income:



|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                        |  | Years Ended September 30, |           
|                                                                                        |  | 2016                      |            |   | 2015 |   |            | 2014 | 
|Net increase in net assets resulting from operations                                    |  | $                         | 33,488,663 |   |      | $ | 12,504,245 |      |  | $ | 20,513,971 |  
|Net realized loss on investments                                                        |  |                           | 1,376,788  |   |      |   |           |      |  |   |           |  
|Net change in unrealized (appreciation) depreciation on investments and Credit Facility |  |                           | (7,529,291 | ) |      |   | 5,551,614  |      |  |   | (1,004,771 | )
|Other book-to-tax differences                                                           |  |                           | 642,719    |   |      |   | 5,788      |      |  |   | 266,378    |  
|Other non-deductible expenses                                                           |  |                           |           |   |      |   | 440,000    |      |  |   | 479,425    |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Taxable income before dividends paid deduction                                          |  | $                         | 27,978,879 |   |      | $ | 18,501,647 |      |  | $ | 20,255,003 |  
|                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  

The components of undistributed taxable income on a tax basis and reconciliation to accumulated surplus on a
book basis are as follows:



|                                                                              |  |                     |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------------------------------------- |  | ------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                              |  | As of September 30, |           
|                                                                              |  | 2016                |            |   | 2015 |   |            | 2014 | 
|Undistributed ordinary income  tax basis                                     |  | $                   | 10,097,684 |   |      | $ | 12,591,089 |      |  | $ | 10,097,482 |  
|(Realized loss carried forward)/Undistributed long-term capital gain (1)      |  |                     | (1,121,514 | ) |      |   |           |      |  |   | 1,652,842  |  
|Distributions payable and other book to tax differences                       |  |                     | (5,793,312 | ) |      |   | (5,203,754 | )    |  |   | (3,989,324 | )
|Net unrealized appreciation (depreciation) of investments and Credit Facility |  |                     | 1,502,874  |   |      |   | (6,026,417 | )    |  |   | (474,803   | )
|                                                                              |  |                     |            |   |      |   |            |      |  |   |            |  
|Total accumulated surplus  book basis                                        |  | $                   | 4,685,732  |   |      | $ | 1,360,918  |      |  | $ | 7,286,197  |  
|                                                                              |  |                     |            |   |      |   |            |      |  |   |            |  



|(1) | As of September 30, 2016, the capital loss carried forward was $1.1 million. This loss can be carried forward indefinitely to be an offset against future capital gains.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The tax characteristics of distributions declared are as follows:



|                                                               |  |                           |            |  |      |   |            |      |  |   |            | 
|-------------------------------------------------------------- |  | ------------------------- | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- | 
|                                                               |  | Years Ended September 30, |           
|                                                               |  | 2016                      |            |  | 2015 |   |            | 2014 | 
|Ordinary income (including short-term gains)                   |  | $                         | 30,472,284 |  |      | $ | 17,206,311 |      |  | $ | 13,473,860 | 
|Long-term capital gain                                         |  |                           |           |  |      |   | 1,653,105  |      |  |   | 2,578,795  | 
|                                                               |  |                           |            |  |      |   |            |      |  |   |            | 
|Total distributions                                            |  | $                         | 30,472,284 |  |      | $ | 18,859,416 |      |  | $ | 16,052,655 | 
|                                                               |  |                           |            |  |      |   |            |      |  |   |            | 
|Total distributions per share based on weighted average shares |  | $                         | 1.14       |  |      | $ | 1.16       |      |  | $ | 1.08       | 
|                                                               |  |                           |            |  |      |   |            |      |  |   |            | 



64



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2016



9. CASH EQUIVALENTS

Cash equivalents represent cash in money market funds pending investment in longer-term portfolio holdings. Our portfolio may consist of
temporary investments in U.S. Treasury Bills (of varying maturities), repurchase agreements, money market funds or repurchase agreement-like treasury securities. These temporary investments with original maturities of 90 days or less are deemed cash
equivalents and are included in the Consolidated Schedule of Investments. At the end of each fiscal quarter, we may take proactive steps to preserve investment flexibility for the next quarter by investing in cash equivalents, which is dependent
upon the composition of our total assets at quarter-end. We may accomplish this in several ways, including purchasing U.S. Treasury Bills and closing out positions on a net cash basis after quarter-end, temporarily drawing down on the Credit
Facility, or utilizing repurchase agreements or other balance sheet transactions as are deemed appropriate for this purpose. These amounts are excluded from adjusted gross assets for purposes of computing the Investment Advisers management
fee. U.S. Treasury Bills with maturities greater than 60 days from the time of purchase are valued consistent with our valuation policy. As of September 30, 2016 and 2015, cash equivalents consisted of money market funds in the amounts of $28.9
million and $21.4 million at fair value, respectively.

10. FINANCIAL HIGHLIGHTS

Below are the financial highlights for the years ended September 30:



|                                                                |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|--------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | - |  | -------- | ----------- | - |  | - | ---------- | -
|                                                                |  | 2016 |             |   | 2015 |   |             | 2014 |  |   | 2013 (6)    |   |  | 2012 (6) |            
|Per Share Data:                                                 |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Net asset value, beginning of period                            |  | $    | 13.95       |   |      | $ | 14.40       |      |  | $ | 14.10       |   |  | $        | 13.98       |   |  | $ | 13.44      |  
|Net investment income (1)                                       |  |      | 1.02        |   |      |   | 1.08        |      |  |   | 1.12        |   |  |          | 1.10        |   |  |   | 0.92       |  
|Net change in realized and unrealized gain (loss)
(1)           |  |      | 0.23        |   |      |   | (0.31       | )    |  |   | 0.26        |   |  |          | 0.15        |   |  |   | 0.83       |  
|                                                                |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Net increase in net assets resulting from operations
(1)        |  |      | 1.25        |   |      |   | 0.77        |      |  |   | 1.38        |   |  |          | 1.25        |   |  |   | 1.75       |  
|Distributions to stockholders (1),
(2)                          |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Distribution of net investment income                           |  |      | (1.13       | ) |      |   | (0.98       | )    |  |   | (0.84       | ) |  |          | (0.95       | ) |  |   | (0.86      | )
|Distribution of realized gains                                  |  |      | (0.01       | ) |      |   | (0.18       | )    |  |   | (0.24       | ) |  |          | (0.10       | ) |  |   | (0.05      | )
|                                                                |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Total distributions to stockholders                             |  |      | (1.14       | ) |      |   | (1.16       | )    |  |   | (1.08       | ) |  |          | (1.05       | ) |  |   | (0.91      | )
|Effect of acquisition of MCG and offering costs
(1)             |  |      |            |   |      |   | (0.06       | )    |  |   |            |   |  |          | (0.08       | ) |  |   | (0.30      | )
|                                                                |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Net asset value, end of period                                  |  | $    | 14.06       |   |      | $ | 13.95       |      |  | $ | 14.40       |   |  | $        | 14.10       |   |  | $ | 13.98      |  
|                                                                |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Per share market value, end of period                           |  | $    | 13.23       |   |      | $ | 11.94       |      |  | $ | 13.78       |   |  | $        | 13.78       |   |  | $ | 12.67      |  
|                                                                |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Total return (3)                                                |  |      | 21.77       | % |      |   | (6.01       | )%   |  |   | 8.05        | % |  |          | 17.17       | % |  |   | 29.43      | %
|Shares outstanding at end of period                             |  |      | 26,730,074  |   |      |   | 26,730,074  |      |  |   | 14,898,056  |   |  |          | 14,898,056  |   |  |   | 6,850,667  |  
|                                                                |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Ratios / Supplemental Data:                                     |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Ratio of operating expenses to average net assets
(4)           |  |      | 3.56        | % |      |   | 3.01        | %    |  |   | 4.45        | % |  |          | 4.43        | % |  |   | 4.20       | %
|Ratio of Credit Facility related expenses to average net assets |  |      | 1.58        | % |      |   | 2.34        | %    |  |   | 1.95        | % |  |          | 1.66        | % |  |   | 1.89       | %
|                                                                |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Ratio of total expenses to average net assets                   |  |      | 5.14        | % |      |   | 5.35        | %    |  |   | 6.40        | % |  |          | 6.09        | % |  |   | 6.09       | %
|Ratio of net investment income to average net assets            |  |      | 7.42        | % |      |   | 7.43        | %    |  |   | 7.77        | % |  |          | 7.68        | % |  |   | 6.64       | %
|Net assets at end of period                                     |  | $    | 375,906,828 |   |      | $ | 372,890,449 |      |  | $ | 214,527,710 |   |  | $        | 210,066,394 |   |  | $ | 95,743,877 |  
|                                                                |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Weighted average debt outstanding                               |  | $    | 140,218,095 |   |      | $ | 123,924,384 |      |  | $ | 147,599,452 |   |  | $        | 71,678,836  |   |  | $ | 46,133,607 |  
|                                                                |  |      |             |   |      |   |             |      |  |   |             |   |  |          |             |   |  |   |            |  
|Weighted average debt per share (1)                             |  | $    | 5.25        |   |      | $ | 7.61        |      |  | $ | 9.91        |   |  | $        | 7.48        |   |  | $ | 6.73       |  
|Asset coverage per unit (5)                                     |  | $    | 2,618       |   |      | $ | 13,598      |      |  | $ | 2,460       |   |  | $        | 3,109       |   |  | $ | 2,275      |  
|Portfolio turnover ratio                                        |  |      | 32.16       | % |      |   | 51.02       | %    |  |   | 62.74       | % |  |          | 81.89       | % |  |   | 50.68      | %



|(1) | Based on the weighted average shares outstanding for the respective periods.
|--- | ----------------------------------------------------------------------------

|(2) | The tax status of distributions is calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP, and reported on Form 1099-DIV each calendar year.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based on the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with our dividend reinvestment plan.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Excludes Credit Facility related costs.
|--- | ---------------------------------------

|(5) | The asset coverage ratio for a class of senior securities representing indebtedness is calculated on our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by
the senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the asset coverage per unit.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Audited by predecessor auditors.
|--- | --------------------------------



65



---

##### Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2016



11. CREDIT FACILITY

Funding Is multi-currency Credit Facility with the Lenders was $350 million as of September 30, 2016, subject to satisfaction of
certain conditions and the regulatory restrictions that the 1940 Act imposes on us as a BDC, has an interest rate spread above LIBOR of 200 basis points, a maturity date of August 2020 and a revolving period that ends in August 2018. As of
September 30, 2016 and 2015, Funding I had $232.9 million and $29.6 million of outstanding borrowings under the Credit Facility, respectively. The Credit Facility had a weighted average interest rate of 2.57% and 2.20%, excluding the undrawn
commitment fees of 0.375% and 0.75%, as of September 30, 2016 and 2015, respectively. The annualized weighted average cost of debt for the years ended September 30, 2016, 2015 and 2014, inclusive of the fee on the undrawn commitment on the
Credit Facility but excluding amendment costs, was 3.51%, 2.62% and 2.35%, respectively.

During the revolving period, the Credit Facility
bears interest at LIBOR plus 200 basis points and, after the revolving period, the rate sets to LIBOR plus 425 basis points for the remaining two years, maturing in August 2020. The Credit Facility is secured by all of the assets of Funding I. Both
PennantPark Floating Rate Capital Ltd. and Funding I have made customary representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities.

The Credit Facility contains covenants, including, but not limited to, restrictions of loan size, industry requirements, average life of loans,
geographic and individual portfolio concentrations, minimum portfolio yield and loan payment frequency. Additionally, the Credit Facility requires the maintenance of a minimum equity investment in Funding I and income ratio as well as restrictions
on certain payments and issuance of debt. For instance, we must maintain at least $25 million in equity and must maintain an interest coverage ratio of at least 125%. The Credit Facility compliance reporting is prepared on a basis of accounting
other than GAAP. As of September 30, 2016, we were in compliance with the covenants relating to our Credit Facility.

We own 100% of
the equity interest in Funding I and treat the indebtedness of Funding I as our leverage. In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that we are in compliance with our asset coverage
ratio after such borrowing. Our Investment Adviser serves as collateral manager to Funding I under the Credit Facility.

Our interest in
Funding I (other than the management fee) is subordinate in priority of payment to every other obligation of Funding I and is subject to certain payment restrictions set forth in the Credit Facility. We may receive cash distributions on our equity
interests in Funding I only after it has made all required payments of (1) cash interest and, if applicable, principal to the Lenders, (2) administrative expenses and (3) claims of other unsecured creditors of Funding I. The
Investment Adviser has irrevocably directed that any management fee owed with respect to such services is to be paid to the Company so long as the Investment Adviser remains the collateral manager.

12. COMMITMENTS AND CONTINGENCIES

From time
to time, we, the Investment Adviser or the Administrator may be a party to legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the
outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Unfunded debt investments, if any, are disclosed in the
Consolidated Schedules of Investments. As of September 30, 2016 and 2015, we had $20.0 million and $4.8 million, respectively, in commitments to fund investments.

13. ACQUISITION OF MCG CAPITAL CORPORTION

We entered into the Merger Agreement with MCG on April 28, 2015 to improve our scale to be more important to borrowers, to increase our
market capitalization, to reduce our expense ratio and to increase diversification.

In August 2015, we completed the acquisition of
MCG whereby we acquired 100% of the net assets of MCG, approximately $166.9 million consisting of primarily cash. In accordance with the terms of the Merger Agreement, each outstanding share of MCG common stock (including shares of restricted stock)
was converted into the right to receive (i) 0.32044 shares of our common stock (with MCG stockholders receiving cash in lieu of fractional shares of our common stock), and (ii) $0.30595 per share in cash. Pursuant to the Merger Agreement,
we issued an aggregate of approximately 11.8 million shares of our common stock to former MCG stockholders, and our Investment Adviser made an aggregate cash payment of approximately $11.3 million to former MCG stockholders. The cash payment of
approximately $11.3 million by our Investment Adviser is not subject to any reimbursement arrangement and is therefore not reflected in our consolidated financial statements. We incurred transaction costs of $2.3 million, of which $2.2 million
relating to our share issuance were charged to paid in capital and $0.1 million was expensed.

We accounted for the merger with MCG under
the asset acquisition method of accounting in accordance with ASC 805-50, Business CombinationsRelated Issues. Under asset acquisition accounting, acquiring assets in groups requires ascertaining the cost of the net assets, as well as,
allocating that cost to the individual assets and liabilities comprising the group. Under ASC 805-50-30-1, assets are recognized based on their cost to the acquiring entity, which generally includes transaction costs of the asset acquisition, and no
gain or loss is recognized unless the fair value of noncash assets given as consideration differs from the assets carrying amounts on the acquiring entitys records. Furthermore, ASC 805-50-30-2 provides that if the consideration given is
not in the form of cash (for example, in the form of equity interests issued), measurement is based on the cost to the acquiring entity or the fair value of the net assets acquired, whichever is more clearly evident and, thus, more reliably
measured. Since the acquired net assets were principally comprised of cash, we used the net assets acquired to measure the value of the common stock issued. Finally, ASC 805-50-30-3 provides that the cost of the group of assets acquired in an asset
acquisition is allocated to the individual assets acquired or liabilities assumed based on their relative fair values of net identifiable assets acquired other than non-qualifying assets (for example, cash) and does not give rise to
goodwill.



66



---

##### Table of Contents

Supplementary Data

Selected Quarterly Data (Unaudited)

(dollar amounts in thousands, except per share data)



|                                                                        |  |      |        |   |    |   |        |    |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------- |  | ---- | ------ | - | -- | - | ------ | -- |  | - | ------ | - |  | - | ------ | -
|                                                                        |  | 2016 |       
|                                                                        |  | Q4   |        |   | Q3 |   |        | Q2 |  |   | Q1     |  
|Total investment income                                                 |  | $    | 15,396 |   |    | $ | 10,803 |    |  | $ | 11,346 |   |  | $ | 8,756  |  
|Net investment income                                                   |  | $    | 8,155  |   |    | $ | 6,830  |    |  | $ | 7,265  |   |  | $ | 5,086  |  
|Net realized and unrealized gain (loss)                                 |  | $    | 7,732  |   |    | $ | 6,589  |    |  | $ | (4,829 | ) |  | $ | (3,339 | )
|Net increase in net assets resulting from operations                    |  | $    | 15,887 |   |    | $ | 13,419 |    |  | $ | 2,436  |   |  | $ | 1,747  |  
|Net increase in net assets resulting from operations per common share * |  | $    | 0.59   |   |    | $ | 0.50   |    |  | $ | 0.09   |   |  | $ | 0.07   |  
|Net asset value per share at the end of the quarter                     |  | $    | 14.06  |   |    | $ | 13.75  |    |  | $ | 13.54  |   |  | $ | 13.73  |  
|Market value per share at the end of the quarter                        |  | $    | 13.23  |   |    | $ | 12.40  |    |  | $ | 11.70  |   |  | $ | 11.25  |  
|                                                                        | 
|                                                                        |  | 2015 |       
|                                                                        |  | Q4   |        |   | Q3 |   |        | Q2 |  |   | Q1     |  
|Total investment income                                                 |  | $    | 7,791  |   |    | $ | 7,104  |    |  | $ | 7,983  |   |  | $ | 7,477  |  
|Net investment income                                                   |  | $    | 3,639  |   |    | $ | 4,097  |    |  | $ | 4,456  |   |  | $ | 5,468  |  
|Net realized and unrealized (loss) gain                                 |  | $    | (2,424 | ) |    | $ | 630    |    |  | $ | 1,668  |   |  | $ | (5,030 | )
|Net increase in net assets resulting from operations                    |  | $    | 1,215  |   |    | $ | 4,727  |    |  | $ | 6,124  |   |  | $ | 438    |  
|Net increase in net assets resulting from operations per common share * |  | $    | 0.06   |   |    | $ | 0.32   |    |  | $ | 0.41   |   |  | $ | 0.03   |  
|Net asset value per share at the end of the quarter                     |  | $    | 13.95  |   |    | $ | 14.33  |    |  | $ | 14.30  |   |  | $ | 14.16  |  
|Market value per share at the end of the quarter                        |  | $    | 11.94  |   |    | $ | 13.88  |    |  | $ | 14.03  |   |  | $ | 13.73  |  
|                                                                        | 
|                                                                        |  | 2014 |       
|                                                                        |  | Q4   |        |   | Q3 |   |        | Q2 |  |   | Q1     |  
|Total investment income                                                 |  | $    | 8,221  |   |    | $ | 7,669  |    |  | $ | 7,623  |   |  | $ | 6,844  |  
|Net investment income                                                   |  | $    | 5,320  |   |    | $ | 4,363  |    |  | $ | 3,725  |   |  | $ | 3,228  |  
|Net realized and unrealized (loss) gain                                 |  | $    | (3,043 | ) |    | $ | 579    |    |  | $ | 3,513  |   |  | $ | 2,829  |  
|Net increase in net assets resulting from operations                    |  | $    | 2,278  |   |    | $ | 4,942  |    |  | $ | 7,237  |   |  | $ | 6,057  |  
|Net increase in net assets resulting from operations per common share * |  | $    | 0.15   |   |    | $ | 0.33   |    |  | $ | 0.49   |   |  | $ | 0.41   |  
|Net asset value per share at the end of the quarter                     |  | $    | 14.40  |   |    | $ | 14.52  |    |  | $ | 14.46  |   |  | $ | 14.24  |  
|Market value per share at the end of the quarter                        |  | $    | 13.78  |   |    | $ | 14.29  |    |  | $ | 13.82  |   |  | $ | 13.73  |  



|* | Based on the weighted average shares outstanding for the respective periods.
|- | ----------------------------------------------------------------------------



67



---

##### Table of Contents

|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

(a) Evaluation of Disclosure Controls and Procedures

As of September 30, 2016, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure
controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in
evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

(b)
Managements Report on Internal Control Over Financial Reporting

Managements Report on Internal Control Over Financial
Reporting, which appears on page 43 of this Report, is incorporated by reference herein.

(c) Changes in Internal Controls Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the
Exchange Act) during our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



|Item 9B. | Other Information
|-------- | -----------------

None.



68



---

##### Table of Contents

PART III

We will file a definitive Proxy Statement for our 2017 Annual Meeting of Stockholders with the SEC, pursuant to Regulation 14A, not later than
120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of our definitive Proxy Statement that specifically address the items
set forth herein are incorporated by reference.



|Item 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

The information required by
Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.



|Item 11. | Executive Compensation
|-------- | ----------------------

The information required by Item 11 is hereby incorporated
by reference from our definitive Proxy Statement relating to our 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2017 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.



|Item 13. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

The
information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the
end of our fiscal year.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

The information required by Item 14 is
hereby incorporated by reference from our definitive Proxy Statement relating to our 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.



69



---

##### Table of Contents

PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------

The following documents are filed as part of
this Annual Report:



| | (1) | Index to Financial Statements  Refer to Item 8 starting on page 42.
| | --- | --------------------------------------------------------------------



| | (2) | Financial Statement Schedules  None.
| | --- | -------------------------------------



| | (3) | Exhibits
| | --- | --------



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|3.1   |  | Articles of Amendment and Restatement of the Registrant (Incorporated by reference to the Registrants Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-170243), filed on March 29,
2011).                                                                                                                                                                                                                                                                                                                                                          
|      | 
|3.2   |  | Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K (File No. 814-00891), filed on December 2,
2015).                                                                                                                                                                                                                                                                                                                                                                                                 
|      | 
|4.1   |  | Form of Share Certificate (Incorporated by reference to the Registrants Pre-Effective Amendment No. 5 to the Registration Statement on Form N-2 (File No. 333-170243), filed on April 5, 2011).                                                                                                                                                                                                                                                                                                                                                                                         
|      | 
|10.1  |  | First Amendment to Third Amended and Restated Revolving Credit and Security Agreement, dated as of August 26, 2015, among PennantPark Floating Rate Funding I, LLC, as borrower, PennantPark Investment Advisers, LLC, as collateral
manager, the lenders from time to time parties thereto, SunTrust Bank, as administrative agent, and U.S. Bank National Association, as collateral agent, as backup collateral manager, and as custodian (Incorporated by reference to Exhibit 10.1 to the
Registrants Annual Report on Form 10-K (File No. 814-00891), filed on November 12, 2015).
|      | 
|10.2  |  | Purchase and Contribution Agreement, dated as of June 23, 2011, among PennantPark Floating Rate Capital Ltd., as the seller, and PennantPark Floating Rate Funding I, LLC, as the buyer (Incorporated by reference to Exhibit 10.2 to
the Registrants Periodic Report on Form 8-K, filed on June 29, 2011).                                                                                                                                                                                                                                                                             
|      | 
|10.3  |  | Form of Administration Agreement between the Registrant and PennantPark Investment Administration, LLC (Incorporated by reference to Exhibit 99(k)(2) to the Registrants Pre-Effective Amendment No. 3 to the Registration
Statement on Form N-2 (File No. 333-170243), filed on March 29, 2011).                                                                                                                                                                                                                                                                                       
|      | 
|10.4  |  | Dividend Reinvestment Plan (Incorporated by reference to Exhibit 99(e) to the Registrants Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-170243), filed on March 29, 2011).                                                                                                                                                                                                                                                                                                                                                                      
|      | 
|10.5  |  | Second Amended and Restated Investment Advisory Agreement, dated as of February 2, 2016, between PennantPark Floating Rate Capital Ltd. and PennantPark Investment Advisers, LLC (Incorporated by reference to the Registrants
Quarterly Report on Form 10-Q (File No. 814-00891), filed on February 4, 2016).                                                                                                                                                                                                                                                                          
|      | 
|10.6* |  | Indemnification Agreement, dated as of November 15, 2016, between PennantPark Floating Rate Capital Ltd. and each of the directors and officers listed on Schedule A attached thereto.                                                                                                                                                                                                                                                                                                                                                                                                   
|      | 
|11    |  | Computation of Per Share Earnings (included in the notes to the audited financial statements contained in this Report).                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|      | 
|14.1* |  | Joint Code of Ethics of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|      | 
|21.1* |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|      | 
|31.1* |  | Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|      | 
|31.2* |  | Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|      | 
|32.1* |  | Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|      | 
|32.2* |  | Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|      | 
|99.1  |  | Privacy Policy of the Registrant. (Incorporated by reference to the Registrants Annual Report on Form 10-K (File No. 814-00891), filed November 17, 2011).                                                                                                                                                                                                                                                                                                                                                                                                                              



|* | Filed herewith
|- | --------------



70



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.



|       |  |                                                               
|------ |  | --------------------------------------------------------------
|By:    |  | /s/ ARTHUR H. PENN                                            
|Name:  |  | Arthur H. Penn                                                
|Title: |  | Chief Executive Officer and Chairman of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                        |  |                                                                                              |  |                  
|--------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | -----------------
|Signature                               |  | Title                                                                                        |  | Date             
|                                        |  |                                                                                             
|/s/ ARTHUR H. PENN
Arthur H. Penn       |  | Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) |  | November 22, 2016
|                                        |  |                                                                                             
|/s/ AVIV EFRAT
Aviv Efrat               |  | Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)           |  | November 22, 2016
|                                        |  |                                                                                             
|/s/ ADAM K. BERNSTEIN
Adam K. Bernstein |  | Director                                                                                     |  | November 22, 2016
|                                        |  |                                                                                             
|/s/ JEFFREY FLUG
Jeffrey Flug           |  | Director                                                                                     |  | November 22, 2016
|                                        |  |                                                                                             
|/s/ MARSHALL BROZOST
Marshall Brozost   |  | Director                                                                                     |  | November 22, 2016
|                                        |  |                                                                                             
|/s/ SAMUEL L. KATZ
Samuel L. Katz       |  | Director                                                                                     |  | November 22, 2016



71